Tal Keinan, an Israeli fund manager, was ready for the question he’s always asked when he met with investors in New York in October: Why put your money with a manager whose country Iran has threatened to obliterate.
“We tell them ‘if the Iranians attack, the worst thing that can happen is you lose your money manager not your money,'” Keinan, chief executive officer of Tel Aviv-based KCPS & Company, which oversees $1 billion in assets, said in an interview on Oct. 14. “The notion is trade global markets with global assets and clients, but just do it from Israel because of the concentration of talent here.”
The country is becoming a magnet for hedge fund managers as lower operating costs, the world’s highest number of Ph.D.s and hi-tech startups per capita overshadow concern that Israel may be attacked by missiles from Tehran. The number of funds has grown to 60 overseeing about $2 billion from 13 in 2006, according to a survey of the local industry published in July by Tzur Management. Israel may be on track to replicate the growth that propelled Singapore’s industry from fewer than 20 managers in 2001 to 320 overseeing $48 billion in 2009, Yitz Raab, founder and managing partner of the Tel Aviv-based fund administration company, said in an interview on Nov. 11.
Brevan Howard Asset Management LLP, Europe’s second-biggest hedge fund, opened an office in Tel Aviv at the end of 2005. Sphera Funds Management, the country’s largest hedge fund, raised money in 2007 to start a global health-care fund which now has about $235 million under management. WorldQuant LLC, based in Old Greenwich, Connecticut, has a research and development team in Israel.
Since Iranian President Mahmoud Ahmadinejad said in 2005 Israel should be wiped off the map, Israeli leaders have been saying time is running out to stop the Persian country from developing nuclear weapons. There is a 33 percent chance Israel or the U.S. will launch a military strike against Iran’s nuclear sites by the end of 2013, according to odds compiled by Intrade.com, as of Dec. 25.
Israel, which was nicknamed “Start-Up Nation” in the 2009 book by Dan Senor and Saul Singer, has 54 companies traded on the Nasdaq Stock Market, the most of any country outside the U.S. after China. The nation is also home to more startup firms per capita than the U.S., and the same people who drove that development in Israel’s technology industry are in place to develop quantitative models for hedge funds, Keinan said.
“In order to raise capital in unique locations, you have to offer something that is a lot stronger than what the average hedge fund offers,” Don Steinbrugge, the managing partner of Agecroft Partners LLC, a Richmond, Virginia-based firm that advises hedge funds and investors, said in a telephone interview on Sept. 20.
While global hedge funds are cutting trading costs amid a decline in volumes and deteriorating performance for the $2.1 trillion industry, available talent and lower operating costs are attracting investors to Israel.
Israel has the highest percentage in the world of engineers in the workforce and the highest ratios of university degrees and academic publications per capita, according to the Technion- Israel Institute of Technology. About 135 people per 10,000 have a Ph.D., according to the Finance Ministry, 1.3 times the average of the Organization for Economic Co-operation and Development.
Two job openings posted on Weizmann Institute of Science’s website by Brevan Howard (Israel) Ltd. seek a quantitative analyst and developer. The posts ask for strong mathematical and problem-solving skills. Another posting on the Haifa-based Technion’s website by WorldQuant Research (Israel) Ltd. seeks engineering, math, computers and physics majors. An official for Brevan Howard, who asked not to be identified because of company policy, declined to comment.
“We have the advantage of small size in a place with a strong base of key global opinion leaders and Ph.D. professionals and it is very easy for us to stay ahead of the curve,” Ori Hershkovitz, a partner at hedge fund Sphera, said by phone on Dec. 19 from Tel Aviv.
Israel’s cheaper prices also are a lure, said Hershkovitz. The total office occupancy cost in Tel Aviv is $56.25 a square meter, less than the 82.30 pounds ($134) a square meter in London’s City area, according to a July report from CBRE Global Research and Consulting. In New York’s midtown, office space costs $114 a square foot.
The average annual starting salary for a Tel Aviv-area MBA graduate is the equivalent of $78,300, according to a survey by Israel’s Interdisciplinary Center Herzylia. The comparable starting salary in the U.S. is $169,000 and 106,000 pounds in London, according to a 2011 salary survey conducted by eFinancialCareers.
By assets under management, Israel’s hedge fund industry is still small, eclipsed by the S$59 billion ($48 billion) overseen by funds in Singapore by the end of 2009, according to the Monetary Authority of Singapore.
“I don’t see any sort of strategy or road map coming from anyone above saying we want to build the financial markets,” Sphera’s Chief Executive Officer Amir Ayalon said on Oct. 16 from the company’s Tel Aviv offices. “The natural barriers and challenges are capital market size, regulatory constraints and taxes.”
Israel’s $134 billion stock market represents just 0.3 percent of global market capitalization, data compiled by Bloomberg show.
More than 60 percent of the capital managed by Israeli hedge funds comes from private investors, with the remaining 40 percent originating from primarily Israel-based institutional investors, the Tzur survey shows.
Israeli hedge funds are outperforming peers this year with nine returning an average of 12.2 percent while the HFRX Global Hedge Fund Index added 3.3 percent. Eurekahedge Pte., a Singapore-based compiler of hedge-fund data, said in an e-mailed statement that five Israeli funds it tracks returned an average of 13 percent since 2005.
The global financial collapse in 2008 benefited the industry, leading some executives to give up living in New York and London for Israel. One-third of Israeli-based hedge fund managers have previously worked for international institutions, including UBS Global Asset Management Holding Ltd. (UBS) and Goldman Sachs Group Inc. (GS), according to Tzur’s survey.
“Israel doesn’t have any natural resources -- it’s all about brain power,” said Keinan. “There is nothing to keep the hedge fund industry from expanding. It is happening.”