$250 million is the sweet spot for hedge funds

Asian hedge funds that manage $250 million to $750 million, have at least a three-year track record and are supported by institutional-quality infrastructure are appealing to pensions and sovereign wealth funds, finds a new survey by Citi Prime Finance.

“Asian hedge funds have reported that as they got close to the $250 million-plus mark, they saw increased due diligence requests from sovereign wealth funds and pension funds with investments coming within nine to 12 months after that,” says Dagmar Baeuerle, head of the business advisory group at Citi Prime Finance Asia-Pacific.

It is one of the findings from the survey based on interviews with 58 investors worldwide representing $1.65 trillion in assets under management and hedge fund managers representing $186 billion in AUM.

Institutional investors comprised 57% of global hedge fund assets as of Q1 this year – equal to $1.1 trillion – having surpassed high-net-worth individuals and family offices as the biggest allocators to the alternative asset class in 2009. Pensions now account for 53.5% of institutional allocations to hedge funds, while sovereigns represent 19.8%.

In 2010, hedge funds managing between $1 billion and $5 billion in assets saw the greatest AUM increase compared with the previous year. In Asia, the so-called ‘sweet spot’ – or threshold – is lower, starting at around $250 million.

“These hedge funds typically are the nimblest,” notes Baeuerle. “They can deploy capital in the most flexible manner and are most willing to negotiate fees and other terms.” Compared to multi-billion-dollar funds, smaller fund managers are willing to strike closer relationships with investors and be more accessible and open to discussing portfolio performance.

Investors allocating to Asia also consider fund manager track records to be more important than size, says Baeuerle, who adds that funds in the region tend to be smaller in scale compared with their western counterparts.

However, negotiations on hedge fund fees, which are typically based on the industry standard of 2% for management and 20% for performance, are increasingly becoming challenging, regardless of fund size, according to Martin Visairas, head of Asia-Pacific capital introduction at Citi Prime Finance.

“Some investors will always try to [negotiate] lower fees,” he notes. “It’s tackled on a case-by-case basis, but sometimes investors have to be told ‘no’, although [at other times] there’s room for accommodating the investors’ requests.”

Pension funds in domestic markets such as Taiwan and Korea are expected to increase allocations to alternatives – following in the footsteps of their peers in the West – as aging populations create a need to generate greater returns.

Says Baeuerle: “We believe that, in the next few years, there will be an increased shift into hedge fund investing by those pension funds and sovereign wealth funds in Asia-Pacific that, to date, do not invest in hedge funds.”