Matching Asian hedge funds with investors overseas has become a more arduous process in the post-crisis era, as institutions account for a rising share in allocations.
The US is the main source of capital to Asian strategies, whereas in the pre-crisis days of 2005-07, European capital played a bigger role.
“There were European funds of funds, private banking platforms and high-net-worth individuals interested in what Asia had to offer,” says Deborah Lee, head of Asia-Pacific capital services at Credit Suisse.
Nowadays it is North American institutions, mostly in the US, but also Canada, which are fuelling inflows. “The majority of money coming into the Asian hedge fund managers that we work with is from North America,” says Lee.
Institutional investors have requirements, chiefly in the form of a rigorous due diligence process, with many stipulating that hedge funds have at least $100 million in assets.
“The US has a very attractive investor base, but they need to invest in funds of a certain size,” says Masa Yanagisawa, head of the hedge fund capital group for Deutsche Bank in Japan.
“Those with assets of $50-$60 million and lower are not the managers that US investors are looking at,” he notes.
An added challenge is the capital constraints of Asian strategies, which tend to have a maximum capacity of about $1 billion.
Pedigree managers will attract greater institutional interest as their fund scales up in size, but then hold a soft close as AUM nears $1 billion. This can happen within two years of launch, leaving some prospective investors disappointed, as the due diligence process can take several months.
For example, Fortress Asia Macro Fund, run out of Singapore by seasoned manager Adam Levinson, has recently soft-closed to new investors after raising $750 million since its March 2011 launch.
“Most of the bigger and more successful managers have soft-closed,” notes Yanagisawa.
However, there is still interest for sub-$100 million funds, with some family office and US institutions willing to consider new launches of smaller strategies.
“It’s a question of knowing who the right investor is for the right client and having the ability and resources to deliver that investor to the client,” says Laurianne Curtil, head of Asia-Pacific capital introductions at Goldman Sachs.
To that end, the capital introduction teams of major bank prime brokerages have dedicated executives based overseas to help connect investors with their Asian hedge fund clients.
According to the banks, having people on the ground where investors are based helps to foster better relations and gain a deeper understanding of what allocators are looking for in Asian strategies.
Another approach to hedge fund capital-raising that is used in the US, but not prevalent in Asia, is the use of third-party marketers. They raise money for hedge funds, using various fee structures ranging from a flat monthly retainer fee, to taking a percentage of the fee income that the managers earn from investors.
Agecroft Partners, a US-based consulting and third-party marketing firm for alternative vehicles, has raised assets for three Asia-focused hedge funds: two long/short China equity strategies, and an Asia multi-strategy fund.
“There is a lot of demand for Asia, among investors both in Europe and the US,” says Don Steinbrugge, managing partner at Agecroft. He foresees the firm taking on more Asian clients in the near term.
Steinbrugge and cap intro executives mutually agree that the main criteria for allocators is not who raises money for hedge funds, but the quality of the strategies.
“You need a very solid product, “says Steinbrugge, “with a decent organisation, an investment team with strong pedigrees, an institutional-quality investment process and appropriate risk controls.”
*A full version of this article will appear in the March print edition of AsianInvestor.