Asian hedge funds face stiff competition for allocations

Capital introduction executives from Bank of America Merrill Lynch discuss the state of the market, with capital inflows strong but barriers to entry high.

Asian hedge funds launching this year will find investor interest not seen since the sector’s pre-crisis peak in 2007, but will vie for capital in a highly competitive environment and face a thorough due diligence process, say Bank of America Merrill Lynch capital introduction executives.

“This year is going to be a big year for start-ups, as we’re seeing a lot of launches globally,” says Mairead Kenny, head of BoA Merrill capital introduction for Europe, the Middle East and Africa. They include proprietary desk spin-outs from banks and new funds headed by experienced managers who have timed their emergence with the global market recovery.

While Asia-based funds will benefit from local and overseas investors seeking exposure to the region, the barriers to entry are high, she notes. “The due diligence time is double what it was prior to 2008.”

Statistically, the hedge fund industry has never been better. Global assets under management rose to $2.02 trillion by the end March, exceeding the previous peak of $1.93 trillion in mid-2008, according to Hedge Fund Research. Another data provider, Eurekahedge, forecasts that assets of Asia-based funds will reach an all-time high of $180 billion by year-end.

At capital introduction desks, a cautious and selective investment environment is seen amid the industry’s fever pitch. Asian strategies that have an institutional-level infrastructure, an experienced fund manager with a good track record and assets under management nearing or over $100 million will attract the most attention.

“You need to have a platinum-tier roster of auditor, administrator and prime brokers,” says Sam Tabar, head of BoA Merrill’s Asia-Pacific capital introduction.

However, that does not preclude easy allocations to bank proprietary desk spin-offs nor portend doom for talented managers of smaller funds.

US investors are keenly aware of Asian prop desk spin-outs, according to Wes Ogburn, director of prime brokerage at BoA Merrill in San Francisco. They include upcoming launches by star traders Benjamin Fuchs at Nomura in Hong Kong and Charlie Chan at Credit Suisse in Singapore, in addition to up-and-running firms Azentus (from Goldman Sachs) and Nine Masts (Deutsche Bank).

“There’s always buzz and intrigue around highly profitable managers in the region,” says Ogburn. “However, investors are still circumspect about the ability of the manager to sustain that investment model and performance outside the comfort and infrastructure of a large bank. They need to be comfortable of the prop trader’s ability to translate that success into their own externally managed firm.” 

Meanwhile, smaller Asian funds with experienced managers who have built a good performance record over the past few years will find appreciation among US investors. “There are a number of large and medium-size investors that are looking for more nimble, flexible managers and it’s harder to [be like that] when you’re running $5 billion,” says Ogburn.

Hong Kong-based Tabar notes: “In Asia, there are a number of managers that launched with around $40 million and went up to $500 million.”

At last week’s BoA Merrill Asia Hedge Fund Conference in Hong Kong, 32 of the bank’s regional prime brokerage clients met with 126 investors, of whom 30% were non-Asia based. It compares with 20 managers and 110 investors that attended the bank’s previous event in September 2010. The rise in numbers reflects a wave of new launches and investor interest in the regional sector.

Ogburn sums up Asia’s appeal to overseas investors: “There are few places across the globe with high future growth rates at the country level.”

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