Are we now in calm waters, or just the eye of the storm?

Mon Apr 19, 2010

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What an eventful 24 months we've had...


By Aradhna Dayal, editor

Phew, what an eventful 24 months we've had. As I take over the editor's role at AsiaHedge, I can't help but marvel at the scale and speed of events we probably get to witness only once in a lifetime: markets imploding, a barrage of hedge funds going belly up, industry assets almost halving, then a lightning recovery in markets and the beginning of a slow healing process for Asian hedge funds.

On the surface, all signs look positive. Starting in mid-2009, we've seen investor interest in Asian managers resurge, several high quality launches get off the ground, performance coming back, a large chunk of managers moving above their high water marks and rekindled hopes of capital inflows rushing back into Asian hedge funds in the second half of the year.

However, this may not necessarily be calm ­waters, rather the eye of a storm that we are in - one that may lead to another wave of consolidation by the end of 2010.

True, capital is now coming back in. But anec­dotal evidence suggests that it is going to a highly concentrated pool of managers - either the large-scale international players with a significant presence in Asia (such as Och Ziff and Highbridge) or to a handful of emerging home-grown managers (such as Senrigan) that combine impressive track records with institutional grade infrastructure.

There are several other forces working towards a potential consolidation. Increasing regulatory oversight and demand from investors for world-class operational systems is escalating costs for managers significantly. Put that in the context of the comparatively smaller asset size and boutique nature of Asian hedge fund managers, and you see a real dichotomy. Especially as investors today want to see managers reach a certain scale in terms of assets and business sustainability before they write them a ticket.

Consequently, start-ups and smaller managers are beginning to realise that it will be a long road to third-party asset raising, and those not able to reach a certain size will either fade away or turn into quasi-family offices. Some may opt for the platform route while others, especially highly skilled teams in niche areas, may merge with or get taken over by heavyweights wanting to establish a quick presence in Asia. Either way, there is a clear power shift in favour of investors, seeders and platforms, as clearly shown at the 2010 AsiaHedge Forum (click here for full report).

And yes, the profile of the successful Gen Next manager is also different this time round. They will combine astute investment skills with the chutzpah of a savvy business manager. They will probably be based in Asia (the recent AsiaHedge ­asset survey shows over 70% of assets in Asia-focused­ funds are now managed from within the region) and understand the fragmented and relationships-oriented nature of Asian markets.

The two fund profiles in this issue are key and contrasting examples of these trends. While Orchard Capital epitomises the optimal mix of seasoned investing with sophisticated risk mitigation and operational systems, Argyle Street Management gets its edge from its deep relationships-oriented­ approach to investing in Asia.

But if you think that the Asian hedge fund industry has seen it all, think again. A major wave of regulatory changes, unleashed in the US and quickly adapted by regulators across the world, could be set to rewrite the rules for not just banking but the hedge fund landscape too.

Similar to their global counterparts, Asian hedge funds could very well find themselves in a completely new regulatory and business climate two or three years down the line, and the key to success there will be the agility with which they adapt their investment and business models to it. It will indeed be a new world.

In recognition of the changing landscape, ­AsiaHedge is introducing two new sections starting this month. The first, called Investor Corner, will capture major trends in capital inflows within Asia and delve inside the minds of investors allocating to the region.

The second section debuting this month is on Regulation. It will cover key regulatory changes within and outside Asia that could impact Asia-focused hedge fund managers, and alongside addressing industry concerns, also serve as a platform for the often misunderstood regulators to explain the rationale behind their moves.

Going forward, AsiaHedge will continue to expand its coverage to new alternative structures such as UCITS and hedge fund-private equity hybrids, as it evolves into a complete Asian alternatives publication.