The third largest domestic bank by asset has dipped its toes into South Africa’s expanded retail hedge fund space through self-issued notes.

Absa Bank is finding its way into a piece of the pie in the burgeoning retail hedge funds market in South Africa through bank notes with strategy overlays across protection, volatility control and leverage.  

The Johannesburg-headquartered lender has set up the Absa Fund Linked Solutions (AFLS) platform catering to independent financial advisors and corporates.

“It started with hedge fund managers who would have clients wanting to invest in their funds but wanted something extra such as protection,” said Ubaid Nursoo (pictured), quantitative fund analyst, corporate and investment banking at Absa.  

Fund-linked solutions remain a niche business in the emerging market after a few domestic players decided to exit during their transition to the Fundamental Review of the Trading Book (FRTB) which is being implemented in the country, added Nursoo.

The FRTB is a set of market risk capital rules developed by the Basel Committee on Banking Supervision as part of the broader Basel III framework. 

Meanwhile, Absa which does not manage any hedge funds, has seized upon the opportunity to fill the void by building up the AFLS platform within the FRTB guidelines over the past six years. “There was still a lot of client demand for these fund-linked solutions that we saw in the market,” said Nursoo.

The platform currently offers approximately 100 funds, including 17 hedge funds. 

Five of the underlying hedge funds have been traded so far - 36One Prescient Retail Hedge Fund, Amplify SCI Managed Equity RHF (OysterCatcher Investments), Protea Global FR Retail Hedge Fund, Protea South Africa FR Retail Hedge Fund and Fairtree Wild Fig Multi Strategy Retail Hedge Fund.

Hedge funds, classified as collective investments schemes in South Africa, are categorised as retail hedge funds (RHFs) and qualified investors hedge funds (QIHFs) with a respective minimum investment of ZAR 50,000 (US$ 2,796) and ZAR1m, as required by the Financial Sector Conduct Authority.  

While only RHFs are approved to be on the AFLS platform, investors can add leverage of up 100%, which is generally reserved for QIHFs, at a minimum investment amount of ZAR 100,000, said Nursoo.

In South Africa, RHFs have gained in ground delivering all-time high asset growth and double-digit net inflows.

As of end of 2024, a total of 106 RHFs attracted net inflows of ZAR 11.84 billion despite smaller assets while a group of 115 QIHFs, on the other hand, bled assets of ZAR 70m, according to data from Association for Savings and Investment South Africa (ASISA).  

Together the hedge fund market delivered a record high of ZAR25.7 billion in sales for 2024 with RHF and QIHF accounting for 71% and 29%, respectively. By outstanding net assets value at the year-end, RHF stood at ZAR18.2 billion, or 39% of the total, compared to 32% a year ago.

The AFLS platform also complements Absa’s retail structured products business valued at approximately ZAR14.5 billion. The structured notes are denominated in Rand and listed on the Johannesburg Stock Exchange (JSE). There is an additional amount of USD-denominated bespoke offerings traded over-the-counter.   

There was approximately ZAR90 billion in assets of retail structured notes listed on the JSE as of the end of June, data from the bourse and provided by Absa shows.  

Nursoo declined to disclose the total volume transacted on the AFLS platform citing its infancy stage but pointed to a live strategy named ‘time invariant portfolio protection (TIPP) 80’ valued at ZAR2 billion tracking two mutual funds managed by Dominion.   

With no fixed term, the note allows an investor to employ and suspend TIPP, also referred to as continuous protection, at any point while the specified 80% protection amount is applied to the highest closing net asset value (NAV) of the portfolio.

Nursoo added that the note itself involves no option strategy, but Absa hedges its exposure through an option back-to-back.

The fund-linked solutions charge a protection strategy of 0.60% and leverage funding rate of three-month JIBAR + 2.0%.

“There is a lot of talk internationally about applying volatility control to indices and retail structured product space, but there was no tool in South Africa before to bring this to a fund,” said Nursoo.

One of the live trades he cited is a note tracking a portfolio where the equity component aims to achieve a volatility level through the cash allocation at a cost of 0.15%.

Asset allocation is another use case as the note allows an investor to make changes to their portfolio without a liquidation issue and therefore is more tax efficient.

“Because fund-linked solution is a new product, a lot of investors are still struggling to come around to that intuitive idea of changing a payoff with a structure and a note, rather than within a completely different fund,” said Nursoo.

Furthermore, Absa Bank has listed its first actively managed certificate on the JSE designed to outperform the FTSE/JSE All Share Index over the longer-term on a risk-adjusted basis. The fund had net assets of ZAR107m as of 30 June.

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