Wanted: Asia hedge funds' spare capacity

New Jersey-based Beryl Consulting Group, which provides hedge-fund research to US-based institutions and family offices, is increasing its focus on Asia-based and Asia-focused managers. That's why Vidak Radonjic, the firm's managing principal, is on his first business trip to the region.

Until now, Beryl had been looking at and advising on managers that have been seeded and run within larger organisations, largely based in Europe and the US.

"This way, we feel very comfortable in terms of the level of operational risk, governance and so on," Radonjic says. "We look for diamonds in the rough -- smaller firms using the infrastructure of larger companies. For that reason, we didn't previously come here to do deals."

But since Beryl started looking at smaller, independent managers and at Asia managers in late 2008, it was only a matter of time before Radonjic paid a visit to the region.

"We started to look at Asia-based managers of any type -- both smaller companies within larger entities and independent firms -- 18 months ago, and have been mostly allocating to the first group since then," he says. "Before that, we looked at Asia managers that are based in New York."

Of course, it takes more time and effort to research the smaller managers, particularly those located in Asia. The due-diligence cycle has tripled following the recent crisis, especially for smaller funds, says Radonjic. That is, the time between when Beryl starts looking at and when it allocates a manager used to be three months and is now nine.

AsianInvestor met Radonjic in Hong Kong this week, just before he flew to Shanghai for the Morgan Stanley capital-introductions conference on Tuesday, where he expects about 60 hedge-fund managers to be presenting. This time around, he will not visit Singapore, because he says most of the prime brokers are in Hong Kong. Prime brokers know all the managers, he adds, so speaking to them is probably the best way of "obtaining the colour and feeling the temperature" in the hedge-fund market.

It is clear that more and more opportunities are emerging in Asia, particularly in the event-driven, global macro and special-situations spaces, he says. Beryl is looking at long/short funds as well, but its main focus is on event driven, of which there has been no shortage of recent start-ups, such as from Atom Capital, Chater Capital, FrontPoint, Galaxy Asset Management, Income Partners, Instinct and Senrigan Capital.

"Long/short was a no-brainer last year," adds Radonjic. "Since equities traded at depressed multiples, beta managers were the choice du jour, but now we're in an alpha-generation, quasi 'crisis-management' mode."

As for fund size, that's less important to Beryl than capacity. That's one reason why the firm is looking to Asia now, says Radonjic. Two years ago, Asia-focused hedge funds managed some $200 billion; now they manage $118 billion (as of yesterday), according to research firm Eurekahedge. That means many managers have significant spare capacity, he says, especially since they did not lay off the proportion of staff that those in Europe or the US did during the crisis, despite some big losses.

"Managing less money is easier than managing more money with the same number of people." says Radonjic. I'd rather give money to a manager who can run $500 million, but only has $250 million. So Asia is a very attractive proposition right now."  

Hence, not only do hedge funds in Asia tend to be smaller than in the West, but they can now be even more nimble, he adds. The average size of Asia managers is one-quarter that of US managers, says Radonjic, who says he has found some very high-quality managers in the region and is impressed by the talent as well as the financial and legal infrastructure. "They're just not getting as much money as managers in the US," he says.

"Our sweet spot is smaller managers, because they will be able to generate higher alpha, especially in this region, where there are a lot of smaller-cap opportunities," adds Radonjic. "We're looking for kayaks, not oil tankers."

Another advantage Asia-based firms have is that labour costs are cheap compared to London or New York. As a result, even a small fund may several back-office, risk-management, operations, accounting staff and the like. The knowledge that there are perhaps four such support staff rather than perhaps just one at a smaller manager is a source of comfort, says Radonjic.

One exception to his comment on the regulatory situation in Asia is that of mainland China. "We don't invest in funds that are governed by the Shanghai legal framework -- only those domiciled in Hong Kong or Singapore," he says.

This chimes with the views of some other market participants, such as Singapore-based GFIA. In February, the fund-of-funds and fund-research firm said it had redeemed its allocations to all but a handful of effectively Western managers in Shanghai, due to concerns over transparency and governance issues.

Despite Radonjic's bullishness about Asia hedge funds, he says just a minority of hedge-fund investors in the US are pulling the trigger. Still, there are a lot of big institutions, such as pension funds, looking at the space, he adds, and there may be a lot of pent-up demand that might lead to allocations in the third or fourth quarter.

The longer due-diligence cycle and lower comfort level for US investors with regard to Asia funds is one reason for this, adds Radonjic, but "once the big guys start coming in, we'll see a snowball effect".