South African Hedge Fund (BN52) Guidelines

South African Hedge Funds’ from a regulatory perspective can be split into two:

  • QIHF – Qualified Investor Hedge Funds
  • RIHF – Retail Investor Hedge Funds

As a RIHF is more onerous we will focus on this regulation.


  • A Fund cannot borrow more than 10% of the NAV
  • Additional exposure is available through derivatives but if the derivative is settled via
    • cash settlement – sufficient assets in liquid form must be available to effect settlement
    • physical settlement – sufficient physical assets or sufficient assets in liquid form must be available to effect settlement

Valid Securities 

  • All liquid listed equity, money market and fixed income securities
  • 20% Exposure to commodities provided listed on an exchange and limited physical settlement applies
  • 20% Exposure to unlisted equity
  • 10% Exposure to ‘other’ securities
  • 0% Exposure to immovable property, QIHF’s & private equity

Risk Management

  • Funds can determine exposure & leverage by either
    •  Value-at-Risk (VaR) or
    • Commitment (Exposure) approach
  • VaR of a fund cannot exceed 20%, with 99% confidence level and 20 days holding period (1 month); minimum historical observation period of 1 year with daily historical measurements.
  • Daily VaR may only exceed the daily P&L 4 times in a rolling 250 day window
  • Using Commitment approach, Exposure <200% of NAV
  • Regular Stress testing for derivatives must be carried out

Counterparty (Issuer) Control Limits

  • Netting is permitted to the same counterparty within the same portfolio
  • A Fund cannot hold more than 30% of any one counterparty

Concentration Limits

  • Positions of same security must be less than 10% (can be up to 30% but aggregate positions greater than 10% must be less than 40% of NAV)
  • Counterparty exposure must be less than 30% of NAV
  • Collateral reduces the exposure to an entity

Investment Restrictions

  • Physical & derivative short-selling is allowed but naked short-selling is not allowed

Corporate Governance

  • All directors of a Fund must be independent of the Investment Manager
  • Independence of Auditor, Administrator and Prime Broker
  • Maximum fee charges must be declared


  • Monthly, quarterly & annual reporting
  • Illiquid stocks (greater than a month to liquidate) must be reported

Issues to be Clarified

  • Independent Risk Reporting
  • Daily marked to market (pricing)
  • Liquidity measurement
  • Look trough to underlying holdings

About alundarwood

I am involved in market risk and performance analytics in the financial services industry. My expertise includes portfolio management, fixed income analysis, advanced derivative pricing and building software valuation models.
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