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South African Growth Targeted by Hedge Fund Sector

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LONDON (–The 18th FIFA World Cup may just have ended, but in four years’ time it is South Africa’s turn to host the football tournament, something that is already creating an investment boom and offering potentially big opportunities for the country’s growing hedge fund industry, said the director of a fund of funds based there.

“We should be able to deliver a 15% annual dollar return,” said Kevin Shames, director of Alpha Asset Management. “We certainly think that is sustainable for the next four years.”

Hosting the next World Cup means that South Africa needs to develop infrastructure of all kinds, Mr. Shames said. Leading the list of projects to be built are transport facilities; information technology, telecoms and utilities networks; high definition television hardware; and leisure facilities of all sorts, he said.

Mr. Shames is on a road show in the United Kingdom and Europe for the firm’s Alpha Opportunities Fund, which is launching a new class of shares denominated in dollars. Emergent Asset Management, a London-based hedge fund operator, is marketing the fund in Europe.

It is a fund of funds targeting South African equities with about $40 million under management, but with capacity of around $350 million. The fund hedges out the currency risk arising from the volatile rand. The fund is invested in 11 underlying managers with about 70% of the allocation in long/short equity and 30% following market neutral strategies.

The May-June sell-off in emerging markets took its toll in South Africa. But the Johannesburg Stock Exchange All Share Index has clawed back all but a few percentage points of its 20% plunge that bottomed out in mid-June. That will be good news for the Alpha Opportunities Fund, since it is 70% correlated to the JSE All-Share Index.

“The selling was indiscriminate,” Mr. Shames said. “Some preference shares were knocked by 15%, so in some cases we bought more.”

Alpha Opportunities was launched in April 2005. It returned 19% net of fees for the 12 months to May 2006, Mr. Shames said. The fund will charge an annual management fee of 1.5%, and a performance fee of 10% and has a high watermark. The minimum investment is $50,000.

The South African hedge fund sector has around 16 billion rand ($2.3 billion) in assets under management in about 100 funds, Mr. Shames said. The funds under management are up 130% since the beginning of 2005 and up over one-third so far in 2006, he said.

Mr. Shames says that the relatively late development of the South African hedge fund industry and the presence of pension funds as the biggest investors–they account for an estimated 70% of the allocations–means that transparency is high. “You get a lot of visibility to what you are buying,” he said. What’s more, the higher state of development of South African markets means that liquidity and short-selling opportunities are better than in most emerging markets.

Direct foreign investment in 2005 was 269 billion rand ($38 billion), more than went to India, Mr. Shames noted. He expects GDP growth of around 5% to 6% this year and in 2007.

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Contact Bob Keane with questions or comments at [email protected].


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