Asia-focused hedge funds that were started with the help of a major backer after the 2008 credit crisis are shutting down as a shrinking pool of key investors makes it harder for them to raise capital.
Isometric Investment Advisors Ltd. decided in December to close after its largest startup investor said it would withdraw its cash. Black’s Link Capital Ltd. closed after its biggest investor, a U.S.-based fund of hedge funds, pulled its capital last year, said two people with knowledge of the matter.
New hedge funds that began trading after the collapse of Lehman Brothers Holdings Inc., including those run by refugees from investment banks, were expected to lead a revival for the industry. Instead, managers with more than $5 billion have lured the bulk of allocations, while a more recent crop of large startups are diverting investors from smaller competitors.
“Funds of funds have traditionally been early-stage investors,” said Sam Tabar, head of Asia-Pacific capital introductions at Bank of America Corp.’s Merrill Lynch & Co. unit. “As this sector has retracted somewhat, it has made it more difficult for some managers to move from startup phase to critical mass.”
Institutional investors such as pensions, endowments and government bodies now account for two-thirds of hedge fund assets, instead of less than one-fifth in 2003, according to a Deutsche Bank AG hedge fund investor survey released last month.
Bigger is Better?
Assets managed by global fund of hedge funds shrank 21 percent to $629.6 billion at Dec. 31 from their peak in 2007, according to Chicago-based data provider Hedge Fund Research Inc. Funds of funds act as middlemen, pooling clients’ cash and investing it with hedge fund managers they select. They have lost favor after many lost money in Bernard Madoff’s Ponzi scheme, raising concern that they didn’t adequately screen managers, and as investors sought to avoid paying another layer of fees.
More than half of the fund of fund assets were controlled by 18 firms, each managing more than $10 billion, a Bank of America Merrill Lynch report said last month, citing data from London-based Hedge Fund Intelligence. This concentration benefits larger hedge funds, because funds of funds and institutional investors allocating directly to single managers usually don’t want to account for more than 10 percent of the assets of the managers they choose.
Investors allocated more than 70 percent of the $70 billion new capital they added to the hedge fund industry last year to managers with more than $5 billion, HFR said in January.
About 281 Asia-focused hedge funds have been set up since the end of 2008, 95 percent of which started with less than $100 million, according to Singapore-based data provider Eurekahedge Pte. About 74 percent of them have failed to “significantly” expand assets and 14 percent have since shut, it said. Criteria used by Eurekahedge to define “significantly” include average assets growth of at least $5 million a month, or total capital raising in excess of $100 million.
Asia-focused funds tracked by Eurekahedge oversaw $124.1 billion at the end of last year, 29 percent less than the peak in 2007. They lost an average 8.5 percent in 2011, underperforming the 4.1 percent loss for hedge funds globally, according to Eurekahedge indexes.
“All the smaller funds of funds who used to help and family wealth who used to help early managers grow are just not there,” said Richard Johnston, Hong Kong-based Asia head of Albourne Partners Ltd., a consulting firm that advises investors on hedge funds, private equity and other alternative assets. “The gap between seed capital and getting to a good meaningful sustainable size of $500 million plus is a hard gap to plug.”
Albourne counted 22 Asian startups founded since early 2009 by experienced hedge fund managers and traders with at least $50 million of capital, said Johnston. Of those, four have closed because they failed to raise capital beyond that provided by initial investors, he said.
Among funds still operating, five are “stuck at the launchpad” with less than $200 million and one dominant investor, five have raised more than $500 million, and four have more than $1 billion, he added, declining to identify the companies.
“A lot of the seeders have got their timetables,” said Johnston. “If you don’t get big, they are probably just happy to cut their losses and move on.”
Asian hedge funds started last year by both new and existing managers raised $4.43 billion, the highest amount since 2007, according to a survey by trade journal AsiaHedge. The number included large startups such as former Goldman Sachs Group Inc. proprietary trader Morgan Sze’s Hong Kong-based Azentus Capital Management Ltd., which raised $1.06 billion when it started trading in April.
Hedge fund liquidations in the third quarter last year reached the highest level since the final three months of 2008, according to a report last month from Eurekahedge.
FRM Capital Advisors Ltd. in London, which provided startup capital to Isometric in 2009, notified the Hong Kong-based fund of its intention to invest its money elsewhere after the expiration of their two-year agreement, said Isometric’s Chief Investment Officer Sanjiv Bhatia and Patric de Gentile-Williams, FRM’s London-based chief operating officer.
FRM accounted for about 80 percent of Isometric’s assets in December, said Bhatia. The fund, which wagered on Asian securities affected by mergers and reorganizations, lost 3 percent since its inception in December 2009, said Bhatia, who was formerly head of Goldman Sachs’s Asia equity trading desk and later ran Deephaven Capital Management LLC’s Asian investments. De Gentile-Williams declined to comment on Isometric’s performance.
Black’s Link shut its fund in April, said the two people familiar with its operations. It was founded by former employees of Polygon Investment Partners LLP and managed about $90 million, with the biggest investor accounting for about 75 percent of that, said one of the people familiar with the company. The event-driven fund made a single-digit loss in the year it traded, said the people, who asked not to be identified because the fund is private.
Black’s Link’s co-founder Anthony Correa didn’t reply to e-mails seeking comment. Hani Abuali, another co-founder, declined to comment.
Pangu Capital in Hong Kong returned money in the fourth quarter and shut its fund 22 months after its inception following a decision by its main investor to redeem a large portion of its capital, a person with knowledge of the matter told Bloomberg in January. Assets of the fund, which traded stocks, convertible bonds and bonds in Greater China, peaked at $23 million, with the main investor representing the bulk of it, said the person.
Stanley Ku, former Hong Kong head of Fortress Investment Group LLC shut his own Minerva Macro Fund 10 months after its start in 2010, people with knowledge of the matter said at the time. He lost money on investments and its backer RMF Global Emerging Managers, a unit of Man Group Plc, pulled its capital
John Foo closed the first of his funds in 2009, said a person with knowledge of the matter, after Man, amid an internal reorganization, pulled its $50 million seed money. That investment had accounted for the bulk of the fund’s peak assets of $70 million.
He then moved on to run a more than $200 million Asia event-driven fund for FrontPoint Partners LLC from August 2009, with half of the money coming from the U.S. firm. The fund was closed in June after FrontPoint decided to liquidate most of its funds amid insider trading probes, the person said.
Foo is starting another hedge fund under Kingsmead Asset Management Pte in Singapore that will trade stocks affected by company events such as mergers, privatization and divestiture of assets in Asia outside of Japan. He will start the new fund without a seed investor this time, said a person familiar with the fund’s assets. Hubert Yong, Kingsmead’s chief operating officer in Singapore, declined to comment.
Not all startups since 2008 have struggled. Senrigan Capital Group Ltd. in Hong Kong, founded by Nick Taylor, former head of Citadel LLC’s principal investment business in Asia and Europe, started trading in 2009 with 67 percent of its initial $150 million capital from Blackstone Group LP.
Senrigan oversaw more than $1 billion at the end of last year from more than 50 investors, said a person with knowledge of the matter. Chris Nash, Senrigan’s chief operating officer, declined to comment.
Dymon Asia Capital, a Singapore-based manager, started its macro hedge fund in August 2008 with $113 million, the bulk of which from Tudor Investment Corp., the Greenwich, Connecticut-based hedge fund company founded by Paul Tudor Jones. Dymon’s assets have grown to $2.5 billion from about 90 investors, said Willy Ballmann, its chief operating officer.
The size and longer-term nature of institutional investors’ allocations restricts the universe of funds they can pick from, said Max Gottschalk, Hong Kong-based co-founder of Gottex Fund Management Holdings Ltd. The Swiss company, which allocates $7.4 billion to hedge funds, invests about $300 million across 25 Asia-focused managers, he added.
“The tolerance for under-performance is greater for larger managers than for smaller managers,” Gottschalk said.