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
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
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
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.
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
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.