Asian institutional investors are the prime target for established hedge funds seeking capital in the region but need to meet stringent transparency, liquidity and operational risk criteria.
Elephants are revered for their extensive memories and are particularly venerated in Asia as sacred creatures. It should be no surprise then that Asian investors have taken a leaf out of this animal’s book, refusing to forget the damage done during the financial crisis. Investors throughout the region now want a lot more transparency and control over their hedge fund investments.
As a burgeoning market with a rising number of investment opportunities, meeting these demands is potentially lucrative for hedge fund managers.
Asian investors are demonstrating lower levels of risk appetite than pre-crisis, according to a recent survey by Credit Suisse. Just under half (49%) are willing to invest in a fund with only a three-year track record, much lower than the 70% of US and 57% of European, Middle Eastern and African investors who would consider investing in such a fund.
Many Asian investors were hurt during the financial crisis by aggressive gating and redemption restrictions, says Ben Happ, head of capital services Asia-specific at Credit Suisse in Hong Kong.
“The investors here have a very long memory and have not forgotten the hedge funds that treated investors poorly in that period,” he says. This treatment included being opaque about strategy, too, he adds.
Strategies with the most marketing potential across Asia:
Event driven – general
Long/short equity – fundamental
Global macro
Long/short equity – general
Commodity strategies
CTA/managed futures
Long/short equity – trading
Emerging markets – equity
Fixed income arbitrage/relative value
Event driven – risk arbitrage
Source: Separating fact from fiction in the hedge fund industry: the 2011 Credit Suisse global survey of hedge fund investor appetite and activity
Nevertheless, Asian investors have not turned away from hedge funds. Like their western counterparts, Asian investors are demanding better transparency and liquidity terms and a level of commitment from the portfolio manager. They are tending to gravitate to the larger funds with a solid reputation for producing returns.
Doubting a hedge fund manager’s commitment to the region is one of the key deterrents for an Asian investor considering investment in a fund.
Happ calls this “the tyranny of distance”: hedge funds that do not make a long-term commitment to visit the region frequently are not the ones likely to gain investors’ assets.
He believes a manager needs to commit a minimum of one to two weeks on a quarterly basis to marketing as well as taking time to prepare for the meetings.
“The most successful groups have someone who is dedicated to Asia and is returning consistently, repeatedly, for years on end. That sounds obvious but to actually follow through with it takes more commitment, longevity and staying power than we’ve seen from many groups,” Happ adds.
Asian investors need a dedicated marketing campaign or “face time” as senior associate at law firm Harneys in Hong Kong Mona Nairnie says. This is linked to fundamental cultural differences. In Asia the investors “need to see you a million times, know who you are, know people who know you. That can be very difficult if you’re coming cold to the region. It’s not a cold-call region,” she advises.
Happ does not believe having a permanent presence in the Asian market is necessary. “Even if you set up an office in Hong Kong, you still have to go to Singapore, Tokyo, Beijing, Seoul and Australia frequently. You’re not going to have offices in all of these places so you would still have to travel,” he says.
“As long as the person representing the fund is professional and sophisticated, they should have the cultural astuteness and acuity to manage those relationships well. Of course there are cultural differences in each of these places, but none are insurmountable,” Happ cautions.
Max Gottschalk, senior managing director at Gottex Fund Management and moving to Asia in April, disagrees. He says it is “imperative” to have a local presence as “the fly in and out approach or the outsourcing of marketing to third-party firms is no longer effective. Investors want to see commitment to the region and have access to the investment professionals.”
Chris Barrow, global head of sales at HSBC prime services based in London, also underlines the importance of establishing a permanent office in Asia. He believes a temporary set-up will not give a manager the “credibility” Asian investors seek.
Although Barrow views Hong Kong and Singapore as the key hubs for hedge fund activity in Asia, he highlights the growing importance of Australia and mainland China, notably Shanghai.
Ashley Gunning, co-managing partner of law firm Walkers’ Singapore office, also agrees a local presence is necessary for cultural as well as legal reasons.
“Having a local presence or distributor in Asia is welcomed and is fast becoming essential for the growth aspirations of fund managers. In China, for example, where personal relationships are important culturally, it is vital to have a local presence. In most jurisdictions certain tax benefits are available if you have a local presence,” he notes.
There have been some high-profile hedge fund moves to Asia, supporting Gunning’s argument. John Paulson’s hedge fund was granted a licence to trade in Hong Kong and Soros Fund Management established a Hong Kong office last year. This year former Goldman Sachs trader Morgan Sze’s Azentus Capital registered with the Hong Kong regulator in February and Fortress Investment Group established an office in Singapore.
One difficulty facing managers based outside of Asia is competition from Asia-based managers. Philip Lawson, senior portfolio manager at European-based Lee Overlay Partners, says “Singapore is well covered by its internal hedge funds with very good track records and as they’re on the ground they have the advantage of being local.”
However, some institutional investors such as the Government of Singapore Investment Corporation are keen to look beyond Asia. Institutional investors “look outside Asia for external managers within Europe and the US because the market in Singapore isn’t substantial enough for the amount of investment they have to make,” Lawson adds.
Lawson believes such institutions should be prime targets for hedge fund managers as they have substantial sums to invest, are looking for managers outside the local market, seek diversification through different types of managers, styles and processes, and will not expect a fund to have a local presence.
Anthony D’Silva, managing director of Apex Fund Services in Hong Kong and Shanghai, agrees institutional investors are the most important investor group to target in Asia. For funds managing less than $500 million, he believes the best route to access this source of capital is through private banking platforms.
According to D’Silva, there are roughly 1,700 hedge funds based in Asia running Asia-focused strategies. He estimates that only 10% to 15% are actually on the radar of Asia’s largest institutions as they are more interested in European and US hedge funds with renowned brand names.
“Asian investors won’t look at boutique managers. They are still looking at brand name and size. It’s a very Asian mentality,” he believes.
Credit Suisse’s Happ agrees. “There are many Asian investors beginning to develop a hedge fund programme for the first time or they’ve been invested in fund of funds but they’ve never made a single manager hedge fund allocation before. For those investors the most likely initial allocation would be to large, global, multi-strategy funds and to some of the largest equity long/short hedge funds,” he notes.
Gottex’s Gottschalk echoes this. “There is a clear preference to deal with established managers that have a large infrastructure, global footprint and a large asset base.”
This tendency may be a knock-on effect of the financial crisis, according to HBSC’s Barrow. Asian investors want to look beyond the surface of a fund and examine its “risk management, operational risk, corporate governance and counterparty credit risk,” he says. Such a thorough due diligence procedure is easier for larger funds to deal with, he says.
Thomas Granger, partner at law firm Walkers in Hong Kong, has also observed this trend but thinks larger, established managers are not the sole recipients of capital from Asian institutional investors.
“New managers with key traders who have spun out of banks with a track record for producing strong returns, such as Senrigan Capital and Turiya Capital, have also been extremely well received and invested in by the market,” he says.
Marketing the right type of strategy and vehicle in the right location is key to attracting Asian investors’ interest.
Apex’s D’Silva says traditional long/short equity, fixed income and convertible bond funds are what Asian investors are most interested in, although he also notes a growing interest in commodity strategies.
HBSC’s Barrow says Asian investors have a solid interest in managed accounts as part of their post-crisis quest for TLC: transparency, liquidity and control.
Although Barrow acknowledges a “definite interest” among Asian investors for Ucits vehicles, he “has not seen many take off”.
By contrast Gottex’s Gottschalk believes Ucits products are “very popular in Asia” although vehicle preferences vary “country by country”. He adds that as a whole macro and commodity trading advisor (CTA) strategies have been popular for the past couple of years and as the level of investor sophistication increases there is a rising level of interest in “more conservative market neutral strategies”.
Credit Suisse’s Happ agrees different strategies are popular in different regions. “If you’re a commodity trading advisor, macro or multi-strategy manager, you would want to focus on Japan. If you’re willing to have some flexibility with fees, you may want to focus on Australia,” he says.
Asian institutional investors new to hedge funds often opt for global multi-strategy funds, he believes, while those with a history of investing into funds are more likely to be attracted by a range of strategies.
Harney’s Nairnie says funds of hedge funds (FoHFs) have struggled in Asia since the financial crisis as they “haven’t quite bounced back reputation-wise”. She says FoHFs are not as popular as pre-crisis. “People going into them [FoHFs] ask heaps of questions – they must know exactly where those assets are sitting and the liquidity of the underlying assets compared to the liquidity of the fund,” she notes.
Like Barrow, she doubts the success of Ucits in Asia as Asian investors are “pretty entrepreneurial and don’t want restrictions on what they can do with a fund, how they can hedge or the operational work they can do to make more money out of the fund. They want transparency and they get it by withholding cash until they get those terms.”
Walkers’ Granger believes direct investment as well as FoHFs remain popular. “There has not been as much take-up on Ucits products as had initially been anticipated,” he notes. He thinks the emphasis on TLC has led investors into managed accounts, too.
HBSC’s Barrow acknowledges the difficulty for a hedge fund to distinguish itself from its rivals. In Asia he says this could be achieved by “doing something different or new” and recognising and responding to cultural differences. Even though the majority of communication is done in English, language difficulties can be an issue. Funds that make the effort to tackle this problem could gain an advantage, he believes.
Apex’s D’Silva also emphasises the difficulty for non-Asian hedge fund managers to differentiate themselves. “US and EU hedge funds already tick all of the boxes in terms of the operational and qualitative perspective. They all have independent administrators, custodians and prime brokers.”
To stand out from the crowd, “it becomes a numbers game, a question of performance versus their peers versus the index. And they have to have maintained consistent returns post-financial crisis. Brand name helps as well,” he concludes.
Read more: http://www.hedgefundsreview.com/hedge-funds-review/feature/2035347/asian-institutional-investors-hedge-funds-performance#ixzz1OrANVvxC
