Asia's core attraction to global allocators is that there
are some world class managers who typically still have capacity.
Allocating to a hedge fund manager is the result of a
search for talent allied with capacity, and this is no different
in Asia. But global allocators looking to managers in Asia
will find some different characteristics, some driven by the
youth of the industry, some by the nature of the underlying
capital markets, and some cultural.
Intention of this article
This article provides an overview of the industry in Asia,
primarily for the benefit of potential allocators. While I
have tried to include hard data, publishing schedules and
a very rapidly developing industry mean that the numbers will
inevitably be out of date by the time you read this; qualitative
comment is of far more commercial value. I have therefore
tried to provide as much qualitative colour to the picture
as possible, and have emphasized the commercially useful over
the statistically perfect wherever possible.
Information is attributed wherever appropriate. Otherwise,
opinions and observations are my own and not necessarily those
of AIMA or of GFIA Pte Ltd.
Global allocators are beginning to review the universe of
hedge fund managers in Asia more seriously, and are beginning
to allocate capital to take advantage of quality managers,
even as some of the more directional capital leaves the region.
The fastest growing source of new members for the Alternative
Investment Management Association (AIMA, the industry body
for the hedge fund industry) is Asia, with currently 21% of
global membership in the region.
A recent survey suggested that global allocators currently
had of the order of 2.5% of their assets in Asian strategies,
their intention in aggregate is to increase this over a six-month
period by 44% . Even if the actual rate of growth does not
match that intention, there is no doubt that Asia is rapidly
becoming an inescapable part of the hedge fund world.
According to EurekaHedge, a Singapore-based specialist hedge
fund broker, there are 290 Asian hedge funds, including Japan
If we slice this to include only funds with US$50m or more
under management and at least a 12-month history, we arrive
at a universe of 53 funds. Looking at the numbers slightly
differently, AsiaHedge, the industry journal for the Asian
hedge fund industry, estimates that 35% of management groups
have less than US$50m of assets under management.
Research conducted by GFIA, an independent researcher of Asian
hedge funds, suggests that there are some smaller and newer
funds that, qualitatively, deserve serious attention (sometimes
because they are spawned by an already stable organization),
and that the universe of funds that might pass an initial
screen by a fiduciary investor would approach 100.
Applying a rough and ready 80:20 rule to these numbers, we
could assume that about 20 would at any one time be appropriate
for serious consideration. While this is a small absolute
number, it's probably about the same ratio of total funds
to quality candidates as the hedge fund universe in either
the U.S.A. or Europe, and it's certainly a large enough universe
to keep an analyst busy full-time. However the geographic
dispersion (see chart) of the managers' location means that,
although first-level screening can arguably be done anywhere
in the world, qualitative due diligence, including building
trust and confidence with a manager, can be tough for allocators
without a physical presence in the region.
When I first started researching Asian hedge funds in 1998,
a common complaint was that, with no more than one or two
exceptions, they were mostly go-go mutual funds with a performance
fee. While I don't think that was ever a totally fair criticism,
it's true that the universe was initially dominated by fundamentally
driven, long-biased, directional long-short equity managers.
Some of the early Asian hedge funds were unashamedly chasing
the highest returns possible from equity implementation of
macro-type thematic bets.
source EurekaHedge April 03 1
There's still a predominance of equity long-short managers,
and the majority of those are still broadly Jones-model managers
who may do best in sideways or rising markets. But within
the catch-all category of equity long-short, there are single-country,
sector-specific, model-driven, trading, and other niche strategies,
as well of course huge divergence of manager style.
Intuitively, managers based in the region should have better
access to information and therefore better performance, but
there's no hard research to suggest this is the case. There
are some powerful Asian strategies run from London, New York,
and other locations ex-Asia.
The manager breakdown by location broadly is as follows:
Japan has some large managers, aided by the (relative) liquidity
of the stockmarket and availability of stock borrow. Given
that the restructuring of Japan is being emphasized at the
micro level (even if by default due to the lack of restructuring
at the macro level), unsurprisingly equity l/s is the dominant
strategy. Most Japan managers have a dual office structure,
with an onshore and an offshore base, driven by tax considerations
- many in fact have no, or a token presence, onshore, with
London, Singapore and Sydney being popular locations. There
is some fund of funds presence in Tokyo.
Hong Kong has a substantial industry, aided by the relative
depth of the conventional money management industry there.
The majority of Hong Kong funds are therefore equity long-short,
with a smaller number of successful fixed income and relative
value players. There are a couple of global funds of funds
with local presence, and at least 4 indigenous fund of fund
Singapore has a newer and relatively small industry (although
numbers of managers are on a par with Hong Kong), but is demonstrating
a couple of niches in Japan strategies, and relative value
and other non-equity strategies (driven by the number of banks
that have proprietary trading centred in Singapore, as a key
source of management talent). A small number of global funds
of funds have some representation in the Republic.
Australia has a vibrant hedge fund industry, stimulated significantly
by the growing tendency of local institutions to make allocations
to alternatives. Many managers are however very small, but
the top half a dozen are receiving meaningful allocations
from global managers. Strategies represented are an eclectic
mix, including domestic, regional, and Japanese strategies.
The Asian capital markets still limit options for event-driven
managers, stat arb traders, and pure market neutral players,
though there are examples of all these types within the industry.
However, in the search for talent and capacity, there's enough
here to keep the global allocator interested.
Appetite for capital
In 2002, 66 new hedge funds started in Asia, raising an aggregate
US$1.7bn . That's an increase of over 30% in the number of
funds, with an average of US$25m per launch (tho' the median
would be significantly lower than this). The picture for 2003,
as I write, looks broadly similar. Subjectively it feels as
if the typical quality of start-up is improving, partly as
the footprints of those have gone before help newcomers avoid
mistakes, and partly as financial institutions are now shedding
real muscle into the marketplace, with star professionals
looking for second careers.
source EurekaHedge April 03 2
From the chart above, you can see that the typical Asian
hedge fund is still a small business. 70% of Asian hedge funds
have less than US$50m under management (although the same
may be substantially true for the US industry). Asiahedge
calculate that the 5 largest funds in the region control 28%
of the assets, tho' that concentration has been weakening
recently as the industry deepens.
Doing some quick'n'dirty math, the majority of Asian managers
probably generate less than US$1m/year in revenues, for a
business that needs at minimum two or three highly experienced
financial professionals, and usually must service an international
client base. A third of funds have less than US$10m under
management - and of these, half have been in business for
over a year, and still have less than US$10m of assets. That's
a great deal of personal commitment for the managers running
Even in the US and Europe, many start-ups struggle to achieve
critical mass. But in Asia even managers who bring significant
credibility to a new operation can find it difficult to achieve
There are several reasons for this.
First, the industry is young. Fewer than 100 funds have been
running for more than three years (and only 40 or so for more
than five years) and therefore the supply of "graduates"
carrying with them a track record and reputation from existing
firms, is limited. Asia isn't a conventional "lifestyle"
destination for professionals leaving careers in the U.S.
and Europe to resettle, so apart from a few hedonists in Singapore
and Sydney, few experienced professionals choose to relocate
to Asia from elsewhere. So talent typically is new to the
hedge fund industry, usually from long-only asset management
houses, or proprietary trading, with the learning curves widely
associated with those career paths, and resulting hesitation
on the part of allocators. One of the implications for an
allocator is that the organization needs to show a good learning
feedback loop - often an excellent manager will produce the
best returns after 12-18 months running a hedge fund, when
he's learnt the hardest lessons, and allocators need to be
sensitive to where in the learning cycle the manager is.
Secondly, many allocators are unfamiliar with the capital
markets in Asia, and therefore are less comfortable with strategies
in this playground. The nature of the markets here has some
implications for the industry, too.
This is unsurprisingly a short section. Most Asian hedge
funds, while they may have an onshore advisor conforming to
local regulations, offer offshore and largely unregulated
product. Furthermore, to date, most Asian allocators and investors
have preferred to invest in such structures. A long discussion
of regulations would be fruitless, with the exception of some
comment about the appearance of regulated retail-oriented
products, which are feasible, though arguably not that important
yet, in several jurisdictions.
The industry in Asia typically offers Cayman structures,
US LLPs, and separate accounts, and global allocators face
few regulatory hurdles. In most cases, allocators need only
confirm as part of their organizational due diligence process
that the onshore management company is appropriately regulated
and licensed - their counterparty risk will be with a type
of structure with which they are very familiar.
Some managers in some jurisdictions (Australia, Japan) offer
domestic funds for local investors who find offshore structures
difficult for tax or other reasons.
Australia, Hong Kong, Japan, and Singapore all allow retail
offerings of hedged product. The requirements in each jurisdiction
differ, and as always the commercial realities of distribution
and demand will dictate whether a manager wishes to offer
product to local retail markets and whether therefore the
cost of a domestic structure is warranted. To date only Japan
has seen really significant demand, with Australia making
some headway. In Hong Kong and Singapore retail demand has
been slow to appear.
Characteristics specific to Asian strategies
"Asia" is not a single market. Depending on their
strategy, managers may focus on one single market, a small
handful of the friendliest, or 14 different markets (the number
of markets included in the widely used MSCI indices). Geographically,
remember that after your 13 hour flight from London (or, may
Allah help you, your epic multi-hop trek from Chicago, losing
a day of your life in the process) to Singapore, the geographic
centre of the region, you still have a 7 hour flight to Tokyo
or Seoul, a 4 hour flight to Hong Kong, a 5 hour flight to
Shanghai, and a 7 hour flight to Sydney. Although almost all
financial professionals speak English, you'll have to negotiate
taxi drivers speaking in a host of languages you don't understand,
and a different currency in each country. And best not to
forget whether you should be thinking of Christian, Buddhist,
Hindu, Muslim, or a host of other country-specific holidays
(Respect for the Aged Day
International Women's Working
. Picnic Day
.etc.!) when you're planning your
All the Asian markets have different characteristics, in
terms of the sectors represented, trading patterns, liquidity,
and, importantly, availability, cost, and convenience of stock
borrow. This of course creates arbitrage and diversification
opportunities, but the dictum that "in a bear market
the only thing that goes up is correlation" is as true
of public equity in the region as any other asset class globally.
Compared with developed markets, there is less corporate
activity in public markets (and therefore few event-driven
strategies), but a resilient and sustainable supply of distressed
paper; typically thin fixed income markets but from high quality
issuers, a fairly highly quality supply of CB paper; some
large but very inefficient derivatives markets, etc. The opportunity
set is coloured differently in Asia.
Liquidity is a rapidly moving target, meaning that accurate
hedging is often either difficult or expensive, or both -
market neutral is at best a target, not a measurable result,
in Asia. Gap risk can be high, and the clever arbitrage strategies
have a habit of exhibiting nasty tails from time to time.
Allocators can expect higher returns to compensate for these
To ensure a supply of consistently profitable trades, a large
proportion of managers are multi-strategy in fact if not in
name. This can be difficult for allocators who both prefer
a clear definition, or use quantitative optimization models
that work best with clean strategies. Moreover, allocators
need to differentiate between style drift, and perfectly legitimate
changes in capital allocation within a fund. This is partly
because Asia is (is always?) in transition and that's also
true of its capital markets. What might be a red light elsewhere
in the world may be pragmatic in Asia. One of the better Japan
long/short equity managers, for example, says "I'd much
prefer to do my research, find my Microsoft, and run it for
several market cycles, and when it's right to do that, I will
- but over the last few years market conditions have dictated
that I trade". And he does, sometimes moving net long
to net short and back within a month - and by doing so has
annualized over 10% a year since inception three years ago.
Will I still back him when he finds his Microsoft, despite
the dramatic strategy shift this will entail? In principle,
yes, as his strategy will very much follow his deep understanding
of the market structure, which is what he's paid for.
Asian shops are, broadly, split into those run by western,
or western-minded, managers, and indigenous, local managers.
Cultural differences can be overstated - at the end of the
day, capitalism is capitalism. However I'd make a couple of
comments (necessarily general - remember, Asia is not homogenous).
First, in most Asian countries, going independent is considered
a one-way street, with no way back into "conventional"
employment. That's an extra disincentive (and, conversely,
an extra badge of courage) for Asian managers to set up. A
number of really good managers in the region don't have the
cultured polish of the Manhattan or Mayfair crowd, and although
a good allocator will see through the polish or lack of it,
it's a hindrance to rapid growth. Finally, many Asian business
people have a culture of control, both of people and of cash.
Many indigenous firms are characterized by a hierarchy that
feels odd to an allocator used to looking at a more collegiate
organization - and many are frankly under-resourced in terms
of numbers and caliber of support (and sometimes investment)
staff, in the interests of cash conservation. I spend a great
deal more of my time than my peers elsewhere in the world
looking at organizational risk - it's a key defining success
factor in allocating to Asian hedge funds.
An advantage, however, is the very real manager diversification
between indigenous and foreign managers. One of the very good
Japan long/short managers I track, owned and managed by local
professionals, typically has negative or very low correlations
with its foreigner-operated peer group that cover a similar
universe of stocks in superficially very similar strategies.
The demonstrable quantitative difference is explained definitively
by very cultural, qualitative differences in the mindset of
the professionals in the business.
But allocators do need to spend more time on their Asian
managers, and this, with the double whammy of distance (awkward
time zones, long flights, and infrequent face to face contact)
slows the rate of investment.
The silver lining, and this is a big one, is that most Asian
managers have capacity. Although we're beginning to see some
strains amongst the better known Japanese specialists, there
remain several world class pure Japan managers with capacity.
In Asia ex-Japan space, less than a handful of managers are
A typical equity long/short manager in Japan would have capacity
of perhaps US$500m, and in Asia ex-Japan, maybe US$200m (although
under current conditions, both these figures may be lower).
There are more than 60 Japan long-short funds that have assets
of less than US$500m (of which, from experience, at least
30 would warrant some interest from a fiduciary investor);
in Asia ex-Japan, 56 funds have less than US$200m, and the
same empirical screen yields another 30 or so of interest
to the professional investor .
Adding all this up, GFIA estimates that currently the good
managers in the region still have an aggregate capacity somewhere
between US$5bn and US$9bn. Given that liquidity has been imploding
and we may be at a cyclical low in market capacity, this capacity
is likely to increase. In terms of sourcing good capacity,
allocators focusing exclusively on the U.S. and Europe are
missing a large part of the potential universe.
So allocators that are prepared to do the work, have a window
of opportunity to find high quality talent, in strategies
that may well have little correlation to their existing holdings
- and actually find that the manager is happy to take their
A final implication of the lack of capital in Asia is that,
generally, information flows are good, as managers realize
they must be flexible to woo investors.
A specialist Asian fund of funds I worked with obtained ongoing
full position disclosure from all but one of the equity managers
in its portfolio. I switched capital from a US-based fund
to a very similar strategy based in Hong Kong (with similar
quant characteristics but about half the capital) purely because
the information flow from the midtown-mafia manager was always
late, thin, and inflexible, while the Asian manager was happy
to provide virtually any information I needed, immediately.
This is an extreme example but not untypical.
Asian appetite for hedged product
Across the region, the major private banks have been active
for many years selling hedged product - largely funds of funds
- to wealthy families and individuals. Over the last two to
three years this product push has reached down to the priority
banking level, so the middle class professional with a few
hundred thousand dollars in the bank has typically already
been exposed to hedged, and in particular, fund of fund product.
As always with the private banking industry, hard numbers
are not available but sales are reported to be substantial.
This is may partially explain why retail response to funds
of funds has been weak - much of the demand has been satisfied
Some funds of funds groups (MAN group, Charles Schmitt in
Hong Kong, Quadriga, etc) have packaged their products successfully
to appeal to a wider spectrum of distribution such as IFAs
While demand from private banking clients across the region
appears broadly homogenous, at the institutional and fiduciary
investor level, the region exhibits diverse characteristics.
Japan accounts for approximately 10% of global demand for
funds of hedge funds , and much of this has been from long
term investing institutions such as life assurance companies
(this group alone is estimated to have invested US$9bn ) and
banks (US$4.5bn ) Many of Japan's institutional investors
have been exposed to the industry since the early to mid '90s
and are now among the world's more sophisticated allocators.
Hong Kong has a number of sophisticated family offices who
are very familiar with hedged assets. At least two major fiduciary
investing institutions have made allocations to hedge funds,
advised by traditional asset consultants as part of a formalized
portfolio construction process; in this respect, Hong Kong
resembles other institutional markets in Europe and elsewhere.
Although the total assets are not large, there is a depth
of understanding of hedge fund allocation skills in the territory.
Demand from Singaporean institutions is currently muted though
this is changing and two major public sector institutions
are taking the asset class seriously. Reported forthcoming
changes in the legislation controlling trustee investments
may accelerate allocations.
Australian superannuation funds have been quietly making
allocations for 2-3 years now, and it is estimated that perhaps
a couple of dozen have now some exposure, either through a
portfolio of single manager funds or funds of hedge funds.
There appears to be at best moderate interest from family
Other Asian markets such as Taiwan and South Korea are making
inroads. South Korea in particular looks interesting as at
least two major institutional investors have made allocations
- in a largely homogenous environment, visible trendsetters
can prove a powerful catalyst.
One of the themes evident in the Asian hedge fund industry
is how the "alpha from beta" seekers are being replaced
by more mainstream allocators. The international money in
Asian hedge funds has often been attracted by the Asian growth
story. Some managers (in particular some of those located
outside the region) have built good businesses riding the
waves, but hedge funds are not the best way to ride a liquidity
driven bull market. During 2002, and continuing into 2003,
there was a gradual erosion of holdings by "Asiaphile"
investors, replaced with allocations from large global allocators
who were less impressed with the Asia story than with the
simple fact of managers doing the right job, with available
capacity. While the number of these allocators is currently
small (around 15-20 houses appear to have credible research
awareness of the region, including such names as Credit Agricole,
Deutsche Bank, Fauchier Partners, Investor Select Advisors,
Parker Global Strategies, Union Bancaire Privee, and others),
both the number of managers on the radar screen, and the number
of allocators interested, appear to be growing.
Despite the second half of last year being treacherous as
markets were buffeted by global events and, especially in
Japan, domestic distortions, managers made money. The ABN
Amro EurekaHedge index returned a creditable 6.3% in 2002,
and has annualized at about 7.8% since the index' inception
in January 2000. Asian equity remains very cheap, and credit
strong. Few managers are currently using their balance sheets
aggressively. Some of the arbitrage strategies are finding
life difficult as hedging is increasingly expensive, and illiquid
markets accentuate gap risk. The consistent performers currently,
include distressed debt strategies (where continued supply
suggests returns may be sustainable), and fixed income, where
a dearth of players ensure consistent opportunities. The better
traders are doing well, and in Japan, although capacity appears
to be at a nadir, the micro restructuring argument supporting
allocations to long/short strategies remains as strong as
A number of managers are reshaping their strategies in reaction
to recent market conditions. Some are widening their universe
(Japan managers beginning to add Korea, for example). Some
are emphasizing trading, as I've discussed. Many new start-ups
are focusing on non-equity sectors of the capital markets.
I can see no reason why the number of managers in the region
should not continue to grow at a net 25% per year or more.
As the capital markets industries reshape, increasing numbers
of competent managers will seek to build independent businesses.
Aggregate capacity is unlikely to be a problem for another
12-24 months, though we are beginning to see the cream of
Asian managers move to soft closing, with one or two hard
Increasingly global allocators will have to include Asia
in their universe - not to do so would mean excluding an increasingly
meaningful slice of the global opportunity set.
In summary, it's the inefficiencies in Asian capital and
information markets which are creating good returns. Investors
should expect both returns and volatilities to be higher,
strategy by strategy, in Asia than in a developed market.
However the universe of Asian managers is less and less directional,
and increasingly able to capture returns from a wider range
of opportunity sets.
Principal, GFIA Pte Ltd
AIMA Council Member, Singapore
This author would like to thank Paul Storey, editor of AsiaHedge,
for his comments, suggestions, and contribution to the scope
of this article, and EurekaHedge for access to their database.
1Source: Deutsche Bank Alternative Investment Survey,
2source: Bank of Bermuda
all these figures are sourced from Eurekahedge’s database
3Source: Barra Consulting 2001. The author believes that although Barra’s absolute numbers will have changed significantly in the intervening 2 years, the ratio cited is probably relatively stable.
4Source: AIP Tokyo estimate, September 2002