Population statistics
Source: AsiaHedge, EurekaHedge; Analysis: GFIA
GFIA estimates that there are 760 funds dedicated to Asian markets. Out of the reporting managers, 481 are run out Asia. As the competition for scarce asset intensifies, a significant number of previously “under-the-radar” managers have registered themselves on hedge fund databases to raise public exposure. At the same time, a noticeable number of very small funds have ceased to update their profiles on databases. We suspect this is either due to poor performance, or the time lag between liquidation and being eventually classified as such on databases. These managers are not necessarily leaving the industry, but are consolidating with larger managers, or closing the fund management entities to focus on managing proprietary capital. We are also aware that a number of the very large funds increasingly prefer not to report to databases; the transparency of the Asian hedge fund industry continues to decrease. Funds which are closed to new money also do not have any incentive to report.
For the first half of 2013, we saw 6 new launches and 10 closures. The new launches were mostly small start-ups focusing on long short equities. In terms of closures, we saw relative value strategies retreat the most relative to the size of their strategy buckets, although long-short funds saw the most exits in absolute numbers. 2013 continues to be a difficult year for fundraising for start-ups as investors have gravitated decisively towards bigger and established funds.
AUM – mid-sized funds seeing inflows
This year, we noticed a marginal increase in the number of firms with AUM between US$200m to US$499m as well as US$50m to US$99m. This coincides with our observations that “mid-sized” Asian funds, especially Japan and China focused ones, are now at last seeing marginal inflows since the start of 2013.
Of the 618 funds that report AUM regularly, 297 of them have less than US$50m under management, the absolute minimum level which we estimate management fees can support the operational expenses of a typical boutique in Asia before salaries – although this figure has likely increased over the past few years. US$100m continues to be the minimum hurdle which, in our experience, must be met before the majority of investors are comfortable to make allocations (and staff can be properly paid). Currently, there are 226 funds with at least US$100m under management and this means only about 37% of the industry is of any interest whatsoever to professional allocators. This, however, is a 9% increase from the 28% in 2012.
Decision making centre
The first half of 2013 saw a sharp increase in the percentage of Asian funds run from within Asia, in particular out of Hong Kong and Singapore.
Decision Making Centre of Asia Hedge Funds
Source: Asiahedge, Eurekahedge; Analysis: GFIA
Note that “decision making centre” is defined as the location where investment decisions are made, not the domicile of the management company.
We suspect this influx of fund managers into Hong Kong is probably due the proximity of the city to mainland China which is experiencing a slow but revolutionary regulation change in the Chinese securities investment fund laws. Managers are able to register private funds independently without going through a trust company structure and they can also, in certain jurisdictions in Shanghai, under the Qualified Domestic Limited Partners (QDLP) program raise money domestically in China. Thus, we also expect an increase in number of funds running out of China in the near future. Some of the more localized trends are summarised below:
• Hong Kong continues to be the preferred choice of managers looking to set up funds investing in Asia.
• Number of US-based managers seeing a gradual decline as more managers recognise the importance of proximity; the empirical evidence is consistent and strengthening
• Japan-based managers saw a partial revival in the country’s hedge fund industry as investors’ interests has once again been ignited as a result of “Abenomics” although significantly increased investor interest, and increased internal allocation from pan-regional hedge funds, has not yet led to very significant inflows
• Australia saw a dramatic fall in fi rst half of 2013 as some of the managers decided to shift their base to cities like Singapore and Hong Kong in order to have a more regional exposure both in terms of investments and capital raising.
Intuitively, one would expect managers based in the region to have better access to information, and therefore better performance. Our research, and that of others, reveals consistently that empirically, this is mostly true5. Overall, GFIA believes that continued asset growth of the Asian hedge fund industry will be driven by large indigenous managers, or the locally established desks of global firms, as size does matter in this game of survival. Investors are clearly prepared to forego some level of performance and fiduciary comfort, in return for the size and “institutional” organisational structures.
Current trends
As we highlighted in our overview, the industry’s unwavering march toward consolidation is both a symptom of the tough fund-raising environment, and the result of the pressure to institutionalise brought to bear by regulators, as well as investors’ nervousness expressed as a preference for the large over the excellent. Hedge fund investors are themselves shifting towards the institutionalised end of the spectrum, with the highest ever concentration of hedge fund assets coming from the largest allocators: 46% of the global industry comprises investors with AUM in excess of US$10bn6. This is certainly a contributing factor in the dominance of large funds globally, and also in the increasing importance of operational due diligence (ODD) processes. At least two other prime brokerages7have issued investor surveys highlighting the strong emphasis on investing in people and process, regulatory and compliance framework, and independent governance – all areas in which Asian managers are perceived to have room for improvement.
The fate of Asian hedge funds is irrevocably tied to that of their underlying equity markets; Asia, like other EM, has disappointed investors this year (with the probable exception of Japan). Accordingly, the biggest swing in investor appetite in 2013 is away from emerging markets focused managers, as both EM equity and EM credit suffered negative moves in sentiment since the beginning of the year. According to Credit Suisse’s July 2013 investor sentiment report, Asia Pac- and EMEA-based investors both indicated net redemptions from EM strategies, while conversely investors from the Americas showed continued net interest. Strategy-wise, the most popular strategies across regions were long-short equity, event-driven, and global macro with high net demand8.
Long-short equity in particular has been the focus since the start of 2013. Additionally, both Japan and China managers have seen renewed interest and actual tickets from overseas investors, and remain the two linchpins of global allocators’ Asian portfolios.
GFIA watchlist
GFIA is Asia’s longest established hedge fund research and consultancy firm. Although we have met the majority of credible Asian fund managers, we have chosen to focus on a selected “Live List” of approximately 48 Asian funds, which we believe are of most interest to professional investors. For this group of funds, we track monthly updates from the manager, set-up face-to-face meetings regularly, as well as generate GFIA research output ranging from meeting notes to our proprietary ratings screen.
The strategy composition of the funds we track broadly mirrors the underlying population, having picked who we believe are the best in their fields. Long-short and long-only strategies make up over 60% of funds, while fixed income has increased to 10% from 5% in 2011. Another well-represented strategy is activist funds, particularly in Japan, which we believe to be an overlooked alpha source. Roughly half of coverage is composed of regional Asian managers, which provide broader, diversified exposure compared to single-country specialists.
About the authors: GFIA provides research, advice and discretionary management of specialized portfolios.
GFIA is focused on managers with clear geographic and knowledge edges based in Asia, Latin America & frontier markets.
* Note that we update and improve our data sources constantly. Therefore, edition-on-edition comparisons may not be strictly accurate. As always, we would much rather have inaccurate but useful estimates than accurately unhelpful data. We strive to avoid the seductive myth that accuracy of data implies better knowledge.
1. At this time, we used Eurekahedge for aggregate information.
2. See GFIA’s Monthly Newsletter July 2012
3. Source: Asiahedge, Eurekahedge and GFIA’s proprietary database.
5. See GFIA Monthly Newsletter June 2010. A brief summary of the research topic and fi ndings is included in the appendix.
6. Goldman Sachs PB Thirteenth Annual Global Hedge Fund Investor Survey 2013
7. Deutsche Bank’s Hedge Fund Consulting Group’s 2nd Annual Operational Due Diligence Survey 2013; The 2013 Credit Suisse Global Survey of Hedge Fund Investor Appetite and Activity
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“The fate of Asian hedge funds is irrevocably tied to that of their underlying equity markets; Asia, like other EM, has disappointed investors this year (with the probable exception of Japan)”
Really? Aren’t hedge funds supposed to be able to use alternative and sophisticated strategies to deliver returns that are not correlated to the wider market? Seems a pretty basic principle.