The introduction of rules splitting South African hedge funds into two categories, qualified and retail, could mark a "watershed moment" for the industry, according to market participants.

Gyongyi King, chief investment officer of Johannesburg-based Caveo, a fund of hedge funds, said the legislation should spark some life into an industry which has been "stagnant" for years.

"Apart from market growth, South Africa's hedge fund industry hasn't gathered a substantial number of new investors in recent years," King said, speaking at Global Investor/ISF's Securities Finance event in Cape Town last week.

"CISCA - potentially - opens up the hedge fund market to your everyday retail investor and results in increased flows to the industry," she added.

Institutional investors, including pension funds, are also being more comfortable with the idea of investing in hedge funds thanks to the legislation, which allows for two types of structures.

A Qualified Investor Fund (QIF) is intended for large investors of over R1m ($70,000) and who have a knowledge of the market.

Contrast this to a Retail Hedge Fund (RF) which has no restrictions as to who can invest, but does contain criteria in terms of the amount of leverage the fund can utilise as well as what derivatives and securities in which it can invest.

Matthew Milne, vice president of prime finance at Deutsche Bank in South Africa, said he expects the country's hedge fund industry to grow "at significant multiples" compared to traditional asset managers due to the new approach.

Although both King and Milne agree that CISCA will place an increased administrative burden on hedge fund managers, they believe the increased increase investor confidence should be worth the cost of compliance.

It is likely to be a gradual process, however, as the market players get to grips with the requirements. Existing hedge funds have until October this year to comply.

Rules introduced in 2011, which allowed pensions to invest up to 15% of into alternative funds whether local or foreign, failed to live up to the hype in terms of increased business.

Other barriers remain, King added, including burdensome regulation in South Africa already in place making it tough to launch a new hedge fund.