By Aradhna Dayal
This summer, I finally decided to set aside some time from the hustle and bustle of the Asian hedge fund world and do a course on Global Strategic Management at Harvard Business School. Walking through the leafy environs of the HBS campus and watching the rowing teams glide on the Charles River at sunrise, I was struck by the fact that what Asian hedge funds really need as the next stage in their evolution is to step away from the noise of day-to-day trading and think about how to successfully go global.
With that in mind, I had extensive discussions with some of the highly impressive and erudite professors at HBS, as well as veterans of the Asian hedge fund business in the US, and was intrigued to learn that very little research or strategic thinking has been done on true global expansion by hedge funds. In fact, it is thought that the hedge fund industry does not lend itself well to globalisation, given the highly specialised strategies (geographic- and asset class-wise) that form the backbone of the industry.
Indeed, there are very few examples of hedge funds that have truly traversed global boundaries. Despite all the talk of institutionalisation, perhaps this is because hedge funds (especially in Asia) remain a cottage industry at heart. Even a fund running a couple of billion dollars will often still employ only about 20-30 people – typically a close knit, like-minded group. The business tends to be very people- and culture-centric, which means that finding the right culture carrier to take the business to new countries is challenging. Finally, key success factors – specific skill sets, trading niche and manager reputation – are not often transportable across borders and make globalisation near impossible for hedge funds.
In Asia, we have seen a couple of rounds of entry by US and European hedge funds – the first between 2005 and 2008 (with a significant retrenchment when the global financial crisis hit) and the second post-crisis, when these funds decided to put together sustainable, long-term plans for Asia. Even then, most are still in a testing-the-water phase, having a small staff that does research and marketing – and trading, if at all, only mostly just the Asian allocations of their global portfolios (though many do aim to have Asia-dedicated products in due course).
A few exceptions to this have been firms such as Marshall Wace (which has successfully followed a hubs-and-spokes model, including its joint venture with GaveKal), as well as the likes of Och Ziff, CQS and (up to last year) Highbridge, which ran significant assets via large Asia-based teams with Asia products.
Asian funds have also been blueprinting roadmaps for their global aspirations, but the question really is: what does globalisation really mean for them? Does it entail firms such as Value Partners that aim to be recognised as a global asset manager specialising in Asia? Or managers such as LIM Advisors (with international sales/trading offices) that have more universal recognition among global investors? Or players such as Ortus that trade global currency markets out of Asia?
As my learned professors at HBS would tell you, the key to globalisation is through aggregation, adaption and arbitrage (the so-called ‘AAA strategy’) – the route Asian hedge funds need to take when going global. Grow organically, concentrate on core activities (such as back office, research in a central, low-cost location) to achieve economies of scale, and add new revenue lines leveraging existing infrastructure. In short, aggregate.
Adaptation in new markets is crucial too, and should be done through actively hiring local professionals rather than transferring teams from headquarters (a good example being the China managers moving into Hong Kong, or firms like SAIL opening New York and London offices).
Finally, arbitraging a skills and knowledge base from the home market into new markets can be highly beneficial. A good example, in my mind, is Fortress, which moved star macro manager Adam Levinson from New York to Singapore last year to run an Asian macro strategy, using his extensive experience in the US running a similar global strategy.
In line with our globalisation theme this month, we bring you an update on True Capital Partner, a Hong Kong-based volatility arbitrage fund that trades via a single global book, and on Taconic, which is moving into Asia using an old Asian hand. We also bring you a Q&A with Permal Group chairman Isaac Souede on how the US elections could reshape the macro climate globally. Finally, we have the AsiaHedge New Funds Survey for the first half of 2012, which shows that 32 funds raised $2.02 billion in that period.