The Asian hedge fund world has gone from cottage industry
to a rapidly maturing, must-have sector for global allocators.
The Asia hedge fund industry is integrating globally. Investors
are putting money not just with Asia strategies based in New
York and London, but with managers based in the Asia-Pacific
"There are now 330 to 350 hedge funds with an Asian
strategy, of which 50-60 are of real interest to sophisticated
hedge fund allocators," says Peter Douglas of Singapore-based
hedge fund consultancy GFIA, in remarks at a recent conference
hosted by Terrapinn.
Estimates by industry players put the Asian hedge fund world
at around $25 billion in assets last year, and Eurekahedge,
a Singapore-based hedge fund consultancy and publisher, calculates
that sum hit $35 billion in January. That's not much compared
to the global hedge fund universe, which is around the $650
billion mark, but it is growing rapidly. Douglas believes
the industry will double in size in the next 12-18 months.
London-based GAM, one of the biggest fund of hedge funds
with $13.3 billion of assets under management, is considering
placing an analyst in the Pacific region in the next year
or so. About 8% of its allocation is to this region. "Before,
all the Asian strategies were in New York, London or Tokyo,"
says Kier Boley, investment manager for GAM's multi-manager
fund responsible for the Pacific. "But as local enthusiasm
has grown and regulations improved to allow you to manage
and market hedge funds, more people have been setting them
up in Asia."
Although the funds established in the Asia-Pacific region
are primarily focused on equity long/short, there is an increasing
number getting into different areas, from global macro to
For example, GAM's Pacific portfolio now invests as little
as 60% in equity long/short, versus nearly 100% a few years
ago. Boley says there is now a greater diversity of entrepreneurs
in Singapore, Hong Kong and Tokyo. "We're also looking
at China-focused funds in Hong Kong, which is a compelling
story," he says.
Singapore in particular is becoming the home to all kinds
of strategies, from Korea and Japan funds to convertible arb
and bond funds. That partly reflects its good business environment
and a recently enthusiastic government, as well as the fact
that it has traditionally been a centre for investment banks'
bond desks, a recent source of start-ups.
Older and Wiser
Two or three years ago the local hedge fund scene was a cottage
industry, but it is maturing - which is critical to win new
clients, whose demands have become complex, says Ivo Felder,
head of hedge fund investment management at Switzerland-based
RMF Investment Management, another of the world's biggest
Four years ago, the end institutional investor just wanted
an absolute return, but today demands risk management, diversification,
liquidity, tax efficiency, transparency, and knowledge transfer
and training so that they can learn how to run hedge funds
themselves, he explains.
Similarly, funds of hedge funds used to be satisfied with
a hedge fund's return, risk management and sufficient disclosure,
but today demand to understand how managers achieve sustainable
alpha, and the big ones like RMF or GAM require a hedge fund
have the scale and capacity to take larger investments.
"The biggest issue funds of hedge funds have with Asia-based
funds is quality of manager, and capacity - most aren't big
enough to accept large cash inflows," says Richard Armstrong,
managing director at Eurekahedge.
"Scalability is a challenge," says Felder at RMF,
particularly as the fund of hedge funds players grow bigger.
"For us, investing in a Thai micro-cap long/short strategy
is out of the question."
Asia-based funds are starting to meet these new requirements.
More of them are hiring professional COOs, research analysts
and traders. They are establishing a controlled risk process,
and their capacity is growing. GFIA's Douglas says the typical
equity long/short fund in Asia can now handle up to $300 million
in assets, up from about $100 million two years ago.
"You now have lots of hedge funds with a three-year
track record," says Joanne Murphy, associate director
for hedge fund business development in Hong Kong. "Three
is the magic number for global allocators."
While all of this is positive, these rosy views must be tempered:
they are more forecasts than established fact. For most of
the hedge funds based in the region, attracting assets remains
Perhaps the biggest hurdle for funds based in this region
is lack of support from local institutional investors and
family offices. In Hong Kong, for example, only two pension
funds are known to have experimented with hedge funds (the
Jockey Club and the Hospital Authority). In Singapore, the
Government Investment Corporation and Temasek have put small
amounts toward funds of hedge funds, and are said to be looking
at trying a few regional managers directly. But these remain
Moreover, even when hedge funds are an acceptable part of
family offices or institutions' allocations, as is the case
in Australia and increasingly in Japan, most of them put their
money with global gatekeepers or strategies based in the US
or Europe. (This is beginning to change in Japan; see our
August/ September 2003 issue.)
Local hedge fund managers say it's hard to raise money. Audrey
Chin, partner at Pacific Asset Management in Singapore, says,
"When we started out, we thought being a hedge fund was
all about performance. But we couldn't access local investors."
For Asian hedge funds that don't fit the stereotype, it's
even harder. Pacific has three funds handling fixed-income,
commodity and global macro strategies. "The investors
who looked at us didn't want that, or if they did, they'd
go to a US manager," Chin says. "They thought someone
based in Singapore couldn't run a global macro fund, that
we couldn't understand the world. They just wanted Asia equity
long/short." Pacific broke through with EIM, another
large Swiss fund of hedge funds manager.
Although a number of global allocators are now taking the
time to visit the Asia-Pacific region, the onus is on fund
managers here to travel. "You have to go to Geneva, Zurich,
London and New York, because your clients need your service
and support, and they want to see you," says James Loh,
managing director at JL Capital in Singapore.
So it's no surprise that the Asian strategies getting the
biggest bucks are still those based in the US or UK. For example,
London-based Sofaer Global Research, which has $900 million
of assets under management, is raising money quickly for Asian
strategies. William Bourne, partner, says, "We recently
made presentations in New York and got three deals on the
spot. This is unheard of in America."
Scott Kalb, principal and co-CEO at Black Arrow Capital,
a Greenwich, Connecticut-based hedge fund manager, says, "Asia
was once out of favour but US institutions now see it as a
selling point." He says his portfolios now have up to
70% of assets invested in Asia Pacific.
For these firms, being located in the West is key. "We
need to be close to our clients," says Kalb. Even the
big hedge fund managers agree that marketing to Asian institutions
is an arduous process; big Japanese investors take an agonisingly
slow time to make decisions. The only way to access Asian
investment is still via funds of hedge funds.
US and European money is reaching Asia because of the region's
growth story, and because regulators in many markets have
made it possible to short. This remains a work in progress:
India, Malaysia, Korea and Taiwan require shorting via synthetics,
which is expensive, and clever tricks such as long/short pair
trades are often unworkable.
But Asia's brighter prospects make it a worthwhile investment.
"Asia is under-owned, particularly in the US," says
Bourne. "It is performing strongly relative to other
long/short asset classes."
But this kind of directional money is not sustainable. Asia
is hot, so Asian hedge funds are hot. Should the Asia story
lose its lustre, this money will go elsewhere. Although more
prime brokers, hedge fund administrators, consultants and
other support services are cropping up, the region's infrastructure
is still inadequate. Most funds based here are too small to
accommodate allocators' capacity requirements, or are closed.
Moreover, just as the industry has rapidly expanded in terms
of new funds, by the same token it is volatile. GFIA reports
that 30 Asia hedge funds have closed so far this year, roughly
one per week.
But the mood is upbeat; the sense is that infrastructure,
capacity and diversity will grow, preferably to a point where
the local industry can stand on its own even if global investors
retreat from Asia.
"The European hedge fund scene was tiny in 1998 and
it grew to $100 billion," says GAM's Boley. "We
see the same signs in Asia: acceptance by the authorities,
investment talent moving in from the long-only world, and