Big is now the byword in Asia’s hedge fund industry, where large institutional investors are mostly seeking to allocate capital to the region’s biggest strategies, Richard Johnston, head of Asia at Albourne Partners, noted at a recent conference in Hong Kong.

The greater involvement of large institutions such as major pensions in hedge fund inflows is “having a major impact on the industry”, he notes. It has resulted in a smaller number of so-called big-ticket allocations.  

Consequently, the biggest funds are receiving the most attention and institutional capital in a trend that one Asian hedge fund executive describes as “the big allocating to the big”.

One of the most noticeable changes, says Johnston, is that large institutions regard a small hedge fund manager as one with $1-3 billion in assets under management. “[While] that used to be enormous by Asian standards, it’s the new norm here.”

For hedge fund managers, it creates “a much higher barrier of entry”, he notes. “If you’re not at least half a billion dollars, you’re just not in the game.”

While large funds are growing, about 80% of managers in Asia are struggling due to their smaller AUM. The attrition rate is high and is set to rise even further, suggests Johnston. There are managers he describes as the walking dead “who stand very little chance of growing, as the environment is against them”.

According to Eurekahedge figures released last week, 85% of Asian hedge funds run less than $200 million in AUM. The biggest strategies, which manage more than $500 million, comprise 6% of the industry – a rise from 4% in 2006.

While there are no strong investor preferences with regards to strategy, Johnston is noticing a trend of “more big global portfolios, less Asia-only portfolios or less thematic portfolios” by hedge fund managers.

Apart from fund size, institutions are setting an individualised set of selection criteria for hedge funds, based on their own investment goals and return targets, says Johnston, whose firm advises investors on hedge fund investments.

“We work with clients on the advisory side and think, ‘What managers will fit them?’.” For instance, an investor might seek returns of Libor plus 300 basis points, but has a set limit on the amount of correlation the portfolio has with the equity market.

Some large institutions are demanding fee reductions “but often they’re prepared to trade them for lock-ups”, says Johnston, referring to an agreement that enables managers to lock in capital from an investor for a specified period that could range from one to three years.

Investors are also expecting more transparency, governance and institutional-grade infrastructure from hedge funds.

After doing due diligence checks, Albourne offers feedback to funds with a view to making them more attractive to investors in terms of instilling best practice.

"We do offer to give feedback on the operations side. It’s very hard, on the investment side, to say to someone, 'We don’t think you’ve got a good nose for this business’," Johnston quipped. "There’s nothing we can do except to tell them: ‘Fire yourself’."

Johnston was speaking at the second annual Fund Manager Selection Asia conference in Hong Kong last week.