Asian hedge funds—ready to join the big time?

By Neil Wilson

Tue Feb 1, 2011

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It seems as if we have been predicting the rise of Asian hedge funds for a long time. In truth, it hasn’t happened yet.


nullThe developed world has been in the doldrums since the financial crisis, and conventional wisdom says the emerging economies of Asia, led by China and India, will be the new drivers of global growth. But even if the Asian economies do become more influential or even dominant, will Asian hedge funds be more influential as well?

It seems as if we have been predicting the rise of Asian hedge funds for a long time. In truth, it hasn't happened yet. From small beginnings in the late 1990s, assets in Asian funds rose sharply over the years to reach nearly $200 billion at the peak in 2007, according to AsiaHedge data.

But during the financial crisis, Asian funds got hit at least as hard as hedge funds in Europe and the United States. And despite a modest recovery, they got back to only $138 billion by mid-2010-still only about 7% of the global market by assets.

There are various reasons why Asian hedge funds have remained something of a backwater in global terms, but also why they may now finally be ready to join the big time.

The Asian hedge fund industry was particularly vulnerable during the financial crisis for several reasons. It was an industry of boutiques mostly running small funds and lacking the so-called institutional standards demanded by hedge fund investors today. Also, there wasn't much variety, with most local managers focusing on simple long/short equity strategies, often with a pronounced long bias.

Most Asian hedge funds offer generous liquidity terms-often monthly with no notice period, gate provision or other ways to restrict redemptions. During the crisis, this meant these funds got hit hard and fast with redemptions.

Finally, Asian hedge funds have historically relied heavily on capital from outside the region, in the early days mostly from Europe and more recently from the U.S. This has made them more vulnerable to the roller-coaster cycles of the Asian markets, with foreign investors running for the exits whenever performance takes a short-term dive.

So why may things be different this time around? For one thing, the structure of the industry has been changing. Ten years ago, a large proportion of Asian hedge funds were not managed from within the region at all, but often from far away in the UK or the U.S. Now, according to the latest AsiaHedge figures, more than 70% of assets are managed from within the region, largely in fast-growing centers like Hong Kong and Singapore. This gives the industry much greater strength on the ground.

Secondly, more major established global players are serious about being in Asia. In the past, some big global players, like the foreign investors, have blown hot and cold on Asia. One is Citadel, which arrived on the scene in 2005 with plans for a huge operation but then had to backtrack with its tail between its legs after the annus horribilis of 2008.

During the past year, the latest wave of managers ramping up a presence in Asia has included some of the oldest U.S. firms, such as Soros Fund Management and Moore Capital Management, and big players from Europe like GLG Partners and Pharo Management. One significant recent move was the decision of a top portfolio manager at Fortress Investment Group, Adam Levinson-keynote speaker at the forthcoming AsiaHedge Forum in March-to relocate to the region.

There is also a more institutional feel to the new wave of start-ups in the region. Many of these are led by second-generation managers who graduated from previous funds, including players such as Senrigan Capital, launched by Nick Taylor (formerly of Citadel) and which recently climbed to more than $800 million, and Janchor Partners, launched by former Children's Investment Fund alum John Ho, which recently reached $500 million.

The demand for such newer managers is still coming largely from investors outside the region, but many of these are now being driven by the realization that they need to increase their allocations to Asia. This trend seems unlikely to change anytime soon. And there are signs that regional investors, including the hugely influential sovereign wealth funds-many of which are already significant allocators to hedge funds, but mainly outside the region-are no longer sitting on their hands.

Asia will become firmly established as a major force on the hedge fund map when two further pieces fall into place. Asia needs to start developing its own range of brand names. Firms like Value Partners Group, the $6 billion-plus firm based in Hong Kong, seem well placed to lead that trend.

It also needs to produce its own hedge fund legends. Lei Zhang, founder of the $3 billion Hillhouse Capital Management group, is already on the cusp of that status following his record $8,888,888 donation last year to the Yale School of Management.