Running a hedge fund in the Asia-Pacific region can be as much as 42 percent cheaper than in the U.S. and Europe, helped by lower-than-average compensation, according to a survey by Citigroup Inc.
Small funds started in the region struggle to achieve profitability and expand assets, the fourth-largest U.S. bank cautioned. Ninety-five, or 57 percent, of the 167 regional equity long-short hedge funds which began trading with less than $50 million still manage less than that amount after an average of 5.3 years in existence, it added, citing data from Singapore-based Eurekahedge Pte.
“A critical success factor in the launch of a hedge fund is the size of assets under management at launch,” Citigroup said in the regional supplement to its Business Expense Benchmark Survey. “Small fund launches in Asia have demonstrated a statistically reduced chance of accelerated assets under management growth.”
The $2.5 trillion global hedge-fund industry is facing pressure to cut fees to attract investors amid rising costs of complying with regulations and client demand. The average Asian hedge-fund startup raised $8 million this year, down from $25 million seven years ago before the 2008 global financial crisis dented investor interest, according to Eurekahedge data provided in early November.
Management fees charged by hedge funds globally have fallen to as low as 1.58 percent for all but the largest companies, from the previous standard of 2 percent, as startup managers have been pressed to offer discounts to early investors. A hedge fund on average needs to manage at least $300 million to break even, the Citigroup global survey released late yesterday found.
In Asia, operating expenses of a $100 million hedge fund are 20 percent lower than in the U.S. and Europe. The gap widens to 42 percent for a hedge fund managing $500 million and 39 percent for those with assets of $1.5 billion, it added.
Asian hedge funds may break even at $135 million, relying solely on a 1.5 percent management fee, Citigroup estimated.
“It is likely that, initially, any excess cash may need to be reinvested into the business to ensure an institutional-grade infrastructure is in place” to help expand assets, the survey said. “Historically, U.S. investors have held the view that Asia-Pacific managers under-invest in operational and technology infrastructure.”
The survey sampled 124 hedge-fund managers in North America, Europe and Asia with combined assets of $465 billion.