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Hedge Fund Monthly
How to Ride the Asian Tiger
Niall Shiner, Eurekahedge

July 2004

Looking at the recent popularity of Asian-based strategies and the amount of money flowing into them, it is tempting to think that from Asia itself there is a lot of money going into, and about to go into, alternatives. In reality there is little correlation between the two investment flows.

There are a variety of reasons why Asia is a more challenging place to sell alternatives than the West. First is its lack of a geographical centre for alternatives. While in the West very large market presences cluster around New York, Geneva and London, in Asia a much smaller quantum of money is spread over about six cities. To cover Asia fully, you need to visit Tokyo, Hong Kong, Singapore, Korea, Taiwan, and of course, Australia with the issue of do you travel to both Sydney and Melbourne. Marketing is a time-consuming travelling nightmare.

Then in each country there is a different language and culture and different ways of doing business and most confusing of all, appetites for different kinds of alternatives from a different kind of allocator.

Also alternatives are a "newer" investment class in Asia than in the West. One consequence of this is that there simply is not the breadth of knowledge about how they work and why, and how, they should be bought that there is in the West.

While is it very possible to spend weeks on a marketing trip to Asia, Asia is not where the low hanging fruit is for alternatives.


Sources of Funds

Many meetings will be more educational than allocation focused, with an investment time frame of years. In the West marketing means meeting experienced allocators with money to allocate and who are prepared to pull the trigger. In Asia it is not so simple.

Realistically there are very few funds of hedge funds that are based in Asia and that, unlike in the West, the individual/family money is not concentrated into a few wealth managers or private banks but usually run by the individual families.

One of the bigger features of the Asian market for alternatives is that to a large extent it is not in Asia. Maybe 50% or more of the money that goes into alternatives in Asia is managed outside the region. A Japanese pension fund may decide to allocate 10% of its portfolio to alternatives, then either set up a due diligence and investment team in New York, or simply give the money to a London-based advisory company to manage on their behalf.

The logic for this is inescapable. Not only are the "best " managers unlikely to be based in Tokyo but the sort of styles and managers that the pension fund requires are all going to be based in New York or London anyway.

Having said that, the money going into alternatives directly from Asia is about $30-40 billion. Japan would represent about 60-70% of this, followed by Hong Kong, then South Korea and Taiwan and then Singapore. In terms of who is buying in each country, in Japan it is primarily financial institutions such as banks, with pension funds starting to come in.
A minimal number of family offices, in Japan, are going into alternatives while Hong Kong is more family office money. In South Korea and Taiwan is mainly high net worth individuals or some extreme high net worth individuals, with distribution coming from overseas private banking.

Interestingly government quangos in both Hong Kong and Singapore are starting to put some of their government reserves into alternatives. This is a far cry from 1997 when hedge funds were being criticised for wreaking havoc in Asia's financial crisis.


Product Demand

The sort of alternative investments that Asians are buying reflects their overall newness to the market. It is very much a safety-first, non-adventurous strategy. The demand is primarily for large, Western managed funds of funds and large established US-managed single manager funds.

The criteria are normally set at a five-year track record and $5 billion under management. Underlying investment styles would be the un-exotic, long/short equity or multi-strategy. It is important to realise that the big ticket institutional money in Asia is only now beginning to diversify into non US-based strategies as European strategies are now creeping into portfolios.

Only in rare circumstances would an Asian investor invest in an Asian strategy or an Asian-based manager, as they are seen as simply too small and with the wrong risk profile. Many allocators in Asia already have too much exposure to the region in their companies (for family offices) or equity long-only funds for pension funds.

The most successful foreign names in establishing distribution in Asia are probably but not exclusively Man Group, Grosvenor, FRM and Coutts. All would have marketing offices based in Asia but much of their success has been creating the product that the market needs and using external marketing networks to sell it.


Shifting Product

External marketing networks can consist of anything from private bank and wealth management teams, specialist third party marketers, to independent financial advisors and broking operations. Marketing is fragmented and it will be years before established marketing channels become the norm.

Another avenue of distribution, which is starting to catch on, is plain vanilla white labelling of a Western-based product, for example, a fund of funds.

A bank in Asia may see demand from a segment of its client base for a generic alternative strategy. However it does not have the skill-set or the time frame to build up its own fund of funds business. The solution is to "borrow" the track record of the Western-based manager and market it as an in-house product.

Obviously a proportion of the fees generated have to be paid back to the manager but such a tactic allows the local bank to "get to market" quickly and cheaply. It also has the advantage of both sides concentrating on their core competence - the Western fund of funds, picking and monitoring managers and the Asian-based bank - distribution of product in their market.

Having said that, an overwhelming characteristic of the Asian market is that it is relationship-based rather than product based. People buy financial products from people they have dealt with in the past. This means an on-the-ground presence or access to the market through an established distribution network is the key to selling into Asia. The strategy of flying in every six months doing a range of one-on-one meetings and flying out will be much less successful than in the West. Regular and persistent face-to-face contact is what is required.

Asian investors also have a surprising fondness for wrapper-based alternatives with such bells and whistles as guaranteed or leveraged products. This is particular true the more one moves away from the institutional type investor to a more retail/high net worth clientele.

As the margins associated with wrappers can be extreme this phenomenon has helped the Asian market seem more lucrative than its underlying size would suggest. It is also not unheard of to charge up front fees to get into alternatives.


Where to Focus Your Efforts

So should you persevere with your marketing efforts in Asia? A lot of that depends of what kind of alternative you are. If you are a large, asset-gathering fund of funds type organisation with ambitions to have assets under management running into the billions, the answer is obviously yes. Asia is rich in savings and gradually some of these savings will migrate to alternatives.

There is also a case for saying the "quality" of Asian money is better than some in the West. It might be more sticky as it is more biased to family office and pension type money than fund of funds. More importantly it is "more money behind it" type of money. There is also a school of thought that says having Asian money will be a diversification away from having all your funding from Western allocators.

If you have the patience and budget to build distribution in Asia on a three to five-year view it will reward you.

However if you are a single manager hedge fund looking to get to, say, $1 billion and close your fund then extensive marketing in Asia is probably not worth the hassle.

Several major accounts should be on your radar screen but to a certain extent if you are worth finding they will come to you. Simply speaking there is easier faster and more concentrated money in Curzon Street, Rockefeller Plaza and the Rue du Rhone. And you do not have to get jet lag.


If you have any comments about or contributions to make to this newsletter, please email advisor@eurekahedge.com

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