Asian hedge-fund managers are missing out on the cash flooding into the world’s fastest-growing region, leading some to close funds or defer new offerings.
Singapore-based Amoeba Capital Partners Pte, run by the former head of Asian investments at Morgan Stanley’s asset- management unit, is returning money to investors in its stock hedge fund, citing “tough” industry conditions. Michael Coleman, co-manager of the $1.3 billion Merchant Commodity Fund, in June shelved plans to raise money for an equity hedge fund.
“The Asian hedge-fund industry, overall, has yet to definitively prove to the global investor community that it has matured past the ability to deliver beta,” or investments whose returns tend to track the market, said Kirby Daley, a Hong Kong- based senior strategist with Newedge Group’s prime brokerage business. “This is seemingly constraining asset flows into the region past a certain point.”
Hedge-fund managers in the region are failing to cash in on the world’s fastest economic growth even as their stock-fund rivals are. Asia’s hedge funds saw $1.2 billion of outflows in the first seven months of the year, Eurekahedge Pte said in its September report. In contrast, the region attracted about $19.8 billion in net inflows into equity funds this year, Cambridge, Massachusetts-based EPFR Global said in an e-mail Oct. 12.
Assets of Asia’s hedge funds have shrunk 8 percent to $117 billion since the financial crisis, according to Singapore-based Eurekahedge. That’s even as the region grows at the world’s quickest rate, with Asia’s developing economies set to expand 9.2 percent in 2010, outpacing growth of 2.6 percent in advanced nations, the International Monetary Fund forecast in July.
‘Rough it Out’
One problem is the relatively small size and youth of many Asian hedge funds. Most of the larger institutional investors require managers to oversee at least $100 million and have three years of track record, said Albert Ee, founder of Singapore-based Pilgrim Partners Asia Pte, which started a macro hedge fund in May. Others want to see a track record of at least nine months before committing capital, he said.
“I probably will still need to rough it out for the next six months or so before I start doing serious marketing,” said Ee, a former managing director of Millennium Management LLC’s Asian business. His firm oversees about $28 million, of which half are assets in the macro hedge fund and the remainder are managed accounts for institutions.
The proportion of Asian hedge-fund managers overseeing $50 million or less has grown to 66 percent of the industry, from 57 percent two years ago, according to Eurekahedge.
Pension funds seeking higher returns from alternative investments will be the main source of capital for Asian hedge funds, said Christophe Lee, Hong Kong-based managing director at FrontPoint Partners LLC, the Morgan Stanley hedge-fund unit. He was speaking today at the Hedge Funds Asia Summit hosted by Bloomberg Link in Hong Kong.
The biggest hedge-fund launches next year will be by startups, or spinoffs, Han Ming Ho, a partner at Clifford Chance, one of the first international law firms awarded a Singapore license, said at the same conference today.
“Capital is still difficult to come by,” said Ho. “Startups that come from a spinoff, from a proprietary desk for example, would have a decent amount of seed capital, whether it’s seeded by the bank or whether they raise very good initial seed capital based on their track record.”
Asia-focused hedge funds returned 26 percent last year, less than the MSCI Asia Pacific Index’s 34 percent advance, and lost almost 21 percent in 2008 as the stock benchmark plunged 43 percent, according to Eurekahedge. North American funds gained 23 percent in 2009, matching the jump in the Standard & Poor’s 500 Index, after declining 9.2 percent in 2008, less than a quarter of the losses in the benchmark index, data from the research firm show.
“The source of capital that has supported the Asian hedge-fund industry has been money from the U.S. and Europe and they have been after short-term returns rather than long-term capital growth,” said Shuhei Abe, president and chief executive officer of Sparx Group Co., Asia’s second-biggest hedge-fund firm. “Money dried up after the Lehman Brothers Holdings Inc.’s bankruptcy and the global credit crisis that followed.”
Investors in the U.S. and Europe are less willing to seek Asia-based managers as “travel expense becomes a big part of the budget” when times are hard, said Stephane Pizzo, founder of Singapore-based hedge-fund investing firm Lotus Peak Capital Pte.
“If you’re sitting in Europe or the U.S. and you have the opportunity to invest with a manager based locally, it is a pretty compelling proposition,” said Pizzo, former managing director of Geneva-based Unigestion Holding SA.
Investors also still see “significant opportunities” in U.S. markets and “have not felt the need to look harder” at overseas managers, said Judith Posnikoff, managing director at Irvine, California-based Pacific Alternative Asset Management Co., which invests clients’ money in hedge funds.
Shares on the S&P 500 index are valued at an average 12.3 times estimated earnings, versus 14.2 times for the MSCI Asia Pacific Index.
North American hedge funds continued to attract the most capital, gaining $4.7 billion in August, the seventh consecutive month of net inflows, Eurekahedge said in its report.
Big Versus Small
Smaller managers are also struggling to raise assets as investors are allocating money to larger funds. The money that is flowing into the region is going into the “Asian end of the big global firms” and a small number of boutique firms that have successfully tapped U.S. investors, said Peter Douglas, principal of Singapore-based GFIA Pte, which advises investors seeking to allocate money to hedge funds and runs a wealth-management business.
“Investors are generally focusing on fewer stronger relationships,” said Daniel Mudd, chief executive officer of New York-based Fortress Investment Group LLC, which managed $41.7 billion as of June 30. “Some advantage has accrued to a firm like Fortress that is big enough to have the full level of products and global expertise and client support.”
Fortress is considering launching an Asia-focused macro fund, which seeks to profit from broad economic trends, as it opens an office in Singapore.
Asian hedge funds in the past relied on European investors including private banks and family offices for assets, both of which are now allocating fewer funds, said GFIA’s Douglas.
Meanwhile U.S. investors, which are becoming more substantial allocators to hedge funds globally, are reticent to put money with Asian managers which they find harder to scrutinize due to the distances involved, Douglas said. Investors in funds have increased scrutiny of managers after Bernard Madoff’s $65 billion fraud was uncovered.
There have been 73 Asian hedge fund closures this year, according to Eurekahedge, after 107 in 2009. DragonBack Capital Ltd., a Hong Kong-based manager co-founded by a former Lehman executive, closed its two hedge funds after redemptions, AsianInvestor reported on Oct. 8. DragonBack is now seeking to provide risk-management services to fledgling funds, according to AsianInvestor.
Minerva Macro Fund, set up by Stanley Ku, Fortress Investment’s former Hong Kong head, returned investors’ money 10 months after starting with backing from Man Group Plc, a person with knowledge of the matter said in June.
Amoeba Capital plans to give clients their money by Dec. 31, Managing Partner Ashutosh Sinha said. The Amoeba Capital Asia Fund, which bets on rising and falling stocks in Asia outside Japan, returned 67 percent from its inception on July 10, 2006, through Aug. 31, Sinha said, compared with a 22 percent gain in the MSCI Asia Pacific ex-Japan Index over the same period.
“The hedge fund industry has been tough in the last few years,” said Sinha, who worked at Morgan Stanley Investment Management for 11 years before founding Amoeba Capital in 2006.
The fund has shrunk to $135 million following client withdrawals during the global financial crisis, from a peak of $750 million, he said.
Singapore-based Aisling Analytics Pte had earlier this year sought to raise $300 million for an equity long-short fund investing in commodities and natural resource companies. Long-short funds bet on rising and falling stocks.
“It became a distraction when it was clear that raising money for new funds was much, much harder than pre-2008,” said Coleman, who manages the firm with partner Doug King. “We’ve seen very high levels of due diligence over the last 12 months, but conversion rates appear to be quite low.”
Some still see hope for Asian hedge funds. “There’s huge interest in Asian hedge funds because the world genuinely believes the Asian story,” said GFIA’s Douglas. “What you don’t have is capital flowing.”