The unveiling of DeepSeek, a Chinese AI developer, has already begun to challenge the dominance of established technology firms, says the author. Photo: AFP
Marina Kotsopoulos
As we look toward 2025, hedge funds will navigate a landscape where both challenges and opportunities are closely tied to the movements of offshore markets. While South Africa’s financial market may not provide the high-growth potential seen in the US, or tech sector powerhouses like Nvidia, it remains highly relevant due to its volatility.
South Africa’s market, with its reactive nature, is especially prone to fluctuations, making it a fertile ground for hedge funds to benefit from market unpredictability. As global financial dynamics continue to evolve, the strategies and adaptability of hedge funds will be crucial in navigating the uncertainties of the coming year.
Geopolitical Outlook
Given South Africa’s trade-dependent economy, it is likely to experience significant turbulence from ongoing geopolitical uncertainties, namely the Trump trade wars, Israel-Palestine tensions, and the Russia-Ukraine war. Regardless of whether these issues escalate or de-escalate in 2025, South Africa, with its open economy, is particularly vulnerable to instability that causes disruptions in global supply chains, declining demand for exports, commodity price volatility and currency depreciation.
Hedge funds, however, are well-equipped to navigate this volatility. Their variety of strategies, combining long and short positions with risk management tools like options, futures and currency hedging, enables them to mitigate risks and capitalize on geopolitical developments. By strategically positioning themselves in sectors poised to benefit from geopolitical and shorting vulnerable sectors, hedge funds can both safeguard against potential losses and profit from market dislocations.
AI Breakthroughs
Another major factor dominating markets in 2025 will be the accelerated pace of innovation in the technology sector, particularly in artificial intelligence (AI). The unveiling of DeepSeek, a Chinese AI developer, has already begun to challenge the dominance of established technology firms, intensifying competition among global tech giants. This rapid pace of innovation will likely lead to increased volatility as each new technological breakthrough triggers shifts in market sentiment and stock performance across the tech sector.
Hedge funds are particularly well-positioned to capitalize on these shifts due to their nimble nature. Unlike traditional long-only funds, hedge funds can quickly adjust their strategies, taking advantage of event driven volatility and hedging against risks in real time. By adapting swiftly to technological breakthroughs, hedge funds can thrive in an environment marked by constant disruption and volatility.
Most investors remain underexposed to hedge funds, missing out on the unique advantages these structures provide, particularly during periods of heightened market volatility. For instance, during global market disruptions like the COVID-19 pandemic in 2020, the JSE Top 40 returned +7.01%. In contrast, the AG Capital Rainbow FR Retail Hedge Fund delivered a significantly higher net return of +26.91% to its investors over the same period.
In recent years, regulatory changes have made hedge funds more accessible to a broader range of investors. Notably, Regulation 28 of the Pension Funds Act was amended to allow retirement funds to allocate up to 10% of their capital to hedge funds, a significant shift from the previous stance where such investments were prohibited. Given the current market volatility, as indicated by the turbulent start to 2025, those who are exposed to hedge funds will be better equipped to navigate the uncertainty that lies ahead.
Marina Kotsopoulos is a senior business analyst at AG Capital
BUSINESS REPORT