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Asian hedge fund industry booms

SINGAPORE: Asia’s hedge fund industry is growing rapidly as global investors zero in on the region and more traders and fund managers choose to strike out on their own.

At the same time, Asian investors are warming up to hedge funds, which offer them a chance to earn higher returns and spread their risks wider than if they just relied on traditional investments like stocks and bonds.

According to Eurekahedge, an information service specialising in the hedge fund industry, about 100 hedge funds with Asian themes are likely to be launched this year, up from 86 in 2003. These are funds based in Asia with a global investment mandate or those from outside the region that have a significant allocation to Asia.

Of the hedge funds launched last year, 19 were set up in Australia, 13 in Singapore and 12 in Hong Kong, according to Alexander Mearns, the firm’s chief operating officer

“From the start of 2002 to date, the number of (Asian) funds and assets has more than doubled from 162 funds managing $14 billion to 360 funds managing $33 billion,” Eurekahedge said in a report in February.

For 2004, the industry tracker says it expects Asian hedge fund assets to grow to $43 billion through a combination of asset flows and performance, adding that its estimates are on the conservative side.

Industry watchers and hedge fund managers are seeing growing demand for hedge funds.

“Over the last few years, because of the equity meltdown, absolute return strategy has become more popular with investors,” said Kam Shing Kwang, Hong Kong-based managing director of JP Morgan Private Bank, who advises the bank’s clients on investments.

Hedge funds are investment vehicles that strive to make money regardless of the direction of capital markets. Their strategies can include taking both long and short positions, using leverage and derivatives, and investing across several asset classes.

Investments are restricted to high-net-worth individuals, and in most countries, the funds are largely exempt from the regulatory requirements imposed on mutual funds.

In addition to regular management charges, hedge fund managers also command performance fees based on the fund’s profits.

The industry has a lot of room for expansion in Asia, where the business isn’t as developed as in the US and Europe.

“Asia-strategy hedge funds comprise less than 6 percent of the global hedge funds universe by number and value” even though Asia-Pacific stock markets represent 14 percent of global market capitalization, Eurekahedge said in its report.

Globally, the hedge fund market has accelerated sharply over the past decade, and there were nearly 5,000 active hedge funds with almost $700 billion in assets under management as of September last year, according to estimates provided by Citigroup.

Difficulty in fund raising: But while the industry may be booming in Asia, some of its new entrants are having difficulty raising funds.

For one thing, a lot of the new money being channelled into hedge funds comes from institutions, which tend to favour the big established players, fund managers say.

“If the fund size is too small, obviously we won’t invest... There will be liquidity concerns when we enter and exit,” said Kwang at JP Morgan.

Private bankers usually advise clients to invest in hedge funds of funds, which the banks administer to provide exposure to a wide range of investment strategies and managers. The advantages of such a strategy include access to “quality” managers, a number of whom only accept money from existing investors, and the performance of due diligence by the private bank.

A lack of experience is another factor handicapping newcomers to the industry.

“People in Hong Kong and Singapore are taking a shot at building funds...as asset allocation is moving towards Asia,” said Michael Landau, Paris-based managing director of UOB Global Capital, an asset management company 70 percent owned by Singapore’s United Overseas Bank Ltd.

He said that while many new funds incorporate hedge fund incentive-based fee structures and seek absolute returns, they differ from traditional funds in that they are for the most part “long-biased” and don’t appear to have detailed strategies to control volatility.

A partner in a Singapore-based hedge fund expressed a similar view.

“Many managers that started hedge funds today came from ‘long-only’ fund management houses, and thus have limited experience with shorting (short-selling) and hedging,” he said,

Hedge funds face other difficulties in Asia as well, the fund partner said. Short-selling is banned or restricted in many Asian markets outside Japan, he pointed out, and the relatively low trading volume in some Asian markets makes it difficult for “opportunistic” funds to manoeuvre.

According to Eurekahedge, “the biggest complaint among fund managers is still the lack of available capital. Over 40 percent of the funds in our universe have under $25 million, the break-even point for most management companies.”

To effectively raise money, it said, a management team needs to be traveling constantly to see prospective investors.

“If there is only one manager for the firm, time away from trading is severely detrimental to the fund’s performance,” the industry tracker said.

But in spite of the difficulties, Eurekahedge said it expects more players to enter the Asian hedge fund business, noting that the risk/reward ratio is shifting away from a banking career toward running a boutique hedge fund.

Says the partner in the Singapore fund, who used to be a proprietary trader for a US investment bank: “It’s about money. Successful hedge fund managers can make lots of money due to the profit-sharing structure. Even the best traders want to be free from the bureaucracy and structured environment of a big fund management company to show the world that they are the best.” —Reuters

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