Shooting Stars

Thu Feb 24, 2011

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How the lifecycle theory is bringing about a dynamic shift in Asian hedge funds


By Aradhna Dayal

nullAs another potentially rocky year gets underway, the major headlines dominating the Asian hedge fund world are revolving around several high-profile fund closures and M&As. In Singapore, Artradis is finally shutting shop and Sanjay Motwani's Sansar is returning capital to investors, Brummer has closed down its Karakoram fund and Nezu has entered a strategic deal with Tiger's Julian Robertson.

At first glance it looks as if the much-anticipated consolidation story is finally playing out in Asia. But a closer look reveals that there is a much bigger shift in dynamics and industry structure at play here. What we are seeing is the first panning out of the 'lifecycle theory' in the Asian hedge fund space (which is finally over a decade old and getting more mature) as already seen in more seasoned hedge fund markets such as the US and Europe.

Hedge funds are believed by some to have an average lifespan of three years in developed markets, going through four stages: emerging, growth, maturity and finally decline. That is, of course, highly debatable - as in reality there are very few of the biggest hedge fund groups in the world (with $5 billion assets or more) that have less than a 10-year track record. But in Asia, that lifespan has been much longer anyway given the inefficiencies in the still-developing capital markets and strong fundamental growth in most Asian economies - which has given rise to ample alpha-generating and growth opportunities for Asia-focused hedge funds over the past decade.

However, several of these dynamics are now changing: there is a significant crowding of managers in areas such as Asia equity long/short, China, India and even in the more exotic arbitrage and volatility sphere. The markets themselves are becoming more efficient, trimming excess returns, while the costs of running the business and operational requirements are at an all-time high, particularly for managers still below their high water marks, putting pressure on fees and revenue generation.

Add to this the long due diligence time it takes to win back capital post the global crisis, and it is clear why many of the highly successful hedge fund shops-often run by the original poster boys of the Asian hedge fund industry - are finding themselves past their prime and seemingly at the end of their lifecycle. In short, an Asian sky full of shooting stars!

Also, Asia has produced some fairly successful hedge fund managers and traders with a significant personal net worth (often making up for a large part of their funds' present AUM), and many of them want to move away from the clutter and noise of a large group of investors to running personal and like-minded associates' money in a low-profile and high-conviction environment. In other words, a throwback to the classic boutique hedge fund model, which is leading to lifecycle endings for many of the first-generation Asian hedge fund behemoths.

However, just as spring breathes new life into nature, we are seeing a new crop of post-crisis hedge fund managers in Asia - one that is a lot more institutional and well-structured at the start than the first generation was. This is good news for global investors, who can rebalance their portfolios with the inclusion of this new breed of high-quality emerging Asian managers, who can often provide better performance and smarter than mature funds.

With this in mind, in this issue we bring you growth plans of several of these next generation Asian hedge funds, such as Dymon Asia, Matchpoint, Instinct and Saka Capital, as well as the rebuilding plans of first generation hedge fund stars such as Boyer Allan, Galaxy and Northwest.

The February issue of AsiaHedge also contains our first regional roundtable, the COO Roundtable in Hong Kong. Also included is our New Funds survey, which reveals that the blockages in the arteries supplying capital to the industry are thawing, with 95 new Asia funds garnering $3.8 billion in 2010.

Finally, the AsiaHedge Forum 2011: Meeting Tomorrow Today (www.asiahedgeforum.com) is to be held on 16-17 March in Hong Kong, and is attracting a star cast of speakers and attendees. We look forward to seeing you there.

ISSN: 2151-1845 / CDC10004H