Institutional Investor's Alpha Magazine - March 2008 - (Page 12) Clade Investment CIO Carl Isernhinke is bullish on South Africa. vesting more than 30 percent of their capital outside the country; that figure is expected to increase gradually, however. Historically, the government has done little else to regulate the hedge fund industry, but that may be changing in the wake of a hometown scandal. Cape Town–based Evercrest Capital made a bad bet shorting the stock of South Africa’s largest insurer, Sanlam, in April 2007 and lost R132 million, or almost two thirds of its value. Rules were promptly enacted requiring minimum levels of experience and education for hedge fund managers. According to Cape Town–based portfolio management fi rm Novare Investments (R4.7 billion in assets under management), total hedge fund assets grew by 68.6 percent, to R25.9 billion, from June 2006 to June 2007, as the number of funds increased from 90 to 131. Novare reports that the ten largest funds manage 40 percent of total assets. A niche for funds targeting socially responsible investing arose from the end of apartheid in 1994. South African companies that want to do business with the government — the biggest single consumer in any country — must be designated Black Economic Empowerment enterprises, or BEEs, which means they have to be at least 25.1 percent black-owned. “When we buy equity in a company, we give that company BEE status,” says Zuko Kubukeli, executive director of Johannesburg-based Pan-African Capital Holdings, a black-owned investment management company affi liated with Rand Merchant Bank. Kubukeli says that 18 percent of the capital behind his firm’s R2.5 billion in assets under management was raised abroad from development banks and “families of conscientious investors.” Yorkville Advisors of Jersey City, New Jersey, is among the foreign hedge funds angling for entry into the market as it negotiates for a stake in a South African financial services firm that specializes in making smallbusiness loans. Antony Ghee, a Yorkville associate managing director, notes two major differences between the hedge fund industry in the U.S. and in South Africa: “It’s certainly not as liquid as the U.S. market. And there’s a heavy institutional space — not as much retail trading.” — William Freedman Investors at the Gate A s the gates clang shut on hedge fund redemptions, investment consultants are scrambling as hard as anyone to keep up with the carnage. “We’ve learned how to invest in [hedge funds] but have we learned how to extract capital from them?” asks Neil Rue, a consultant in the Portland, Oregon, office of Pension Consulting Alliance. Many hedge funds that are holding a mess of devalued subprime mortgages and other distressed debt have only recently enforced their right to block redemptions. In some cases, these are preemptive moves to hold on to assets in the hope that they will make a comeback. In others, managers are simply trying to stop runs on the bank. The third — and most spectacular — scenario occurs when margin calls force a hedge fund to impose a gate, as in the recent case of London-based Peloton Partners, which at the time had $3 billion in assets under management. Other funds that have recently blocked redemptions include the Citigroup Corporate Special Opportunities fund ($500 million); GPS Partners in Santa Monica, California ($1 billion); HBK Capital Management in Dallas ($14 billion); Pursuit Capital Partners in Stamford, Connecticut ($650 million); and Drake Global Opportunities ($2.7 billion), managed by New York– based Drake Capital Management. “Some funds that haven’t had gates are adding them,” Photo by Christiaan Diedericks/Pixel Foundry for Alpha 12 • INSTITUTIONAL INVESTOR’S ALPHA • MARCH 2008
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