China hedge funds boom amid sector struggles

Barriers to entry and failure rates have been rising in the "ridiculously concentrated" hedge fund sector, but Greater China managers are a bright spot, says Jo Murphy, Asia-Pacific MD of CAIA.
China hedge funds boom amid sector struggles

Times are tough for hedge funds – especially newer and smaller players – but Chinese managers have been prospering of late, notes Joanne Murphy, Asia-Pacific managing director of the Chartered Alternative Investment Analyst Association (CAIA).

“It’s a brutal sector – three out of five hedge fund businesses [globally] fail,” she said, speaking at AsianInvestor’s recent Taiwan Global Investment Forum. And, if anything, the proportion of those failing is growing.

In 2015, there were 785 new launches of hedge funds globally, not a great deal more than the 674 liquidations, according to Hedge Fund Research (HFR). That compares to 1,113 launches and 775 liquidations in 2011 and even more strikingly 2,073 launches versus 848 liquidations in 2005.

This has resulted in an industry that is “ridiculously concentrated” among the largest players, as barriers for entry have risen ever higher, noted Murphy.

The 10 biggest firms globally out of 11,390 manage some $500 billion in assets, or about 20% of the $3 trillion total, by Eurekahedge and Preqin data (see figure 1). The case is even more striking in Asia, where the top 10 run $76 billion, getting on for half of the $170 billion pool in the region (see figure 2).

Figure 1: The 10 biggest hedge funds globally
Firm Location Total AUM
($ billion)
AUM data
Bridgewater Associates US 150.7 31 Jan, 2016
AQR Capital Management US 74.0 30 Sep 2015
Man Investments UK 51.4 30 Sep 2015
Och-Ziff Capital Management US 44.1 1 Oct 2015
Standard Life Investments UK 37.3 30 Sep 2015
Millennium Management US 34.0 9 Dec 2015
Winton Capital Management UK 33.8 31 Dec 2015
BlackRock Alternative Investors US 32.1 30 Sep 2015
Renaissance Technologies US 31.3 31 Jan 2016
Viking Global Investors US 31.0 30 Sep 2015

Source: Preqin – Q1 2016 HF Update

Figure 2: The 10 biggest hedge funds in Asia Pacific
Firm Location Total AUM
($ billion)
AUM data
Platinum Asset Management Australia 18.6 31 Dec 2015
Hillhouse Capital Management Hong Kong 15.2 31 Dec 2014
Value Partners Hong Kong 14.5 30 Sep 2015
Springs Capital China 5.2 31 Oct 2015
Dymon Asia Capital Singapore 4.7 30 Jun 2015
Graticule Asset Management Asia Singapore 4.1 30 Sep 2015
Myriad Asset Management Hong Kong 4.0 31 Mar 2015
Turiya Advisors Asia Hong Kong 3.5 30 Sep 2015
Greenwoods Asset Management Hong Kong 3.2 31 Oct 2015
Ellerston Capital Australia 3.0 30 Nov 2015

Source: Preqin Special Report – 1Q2016

The growing need for scale is one reason for the concentration. Ordinarily, a hedge fund needs $250 million in AUM to pay staff, build infrastructure and to cover operational costs, Murphy said. However, as of end last year, about 65% of all hedge funds globally were less than $250 million, and thus unprofitable.  

Institutional investors won't buy anything they will get fired for, so the businesses are concentrated in the big names, Murphy said. As of 2015, about 97% of all hedge fund assets were managed by firms with AUM of more than $250 million, she added.

However, China is a bright spot for the industry, having seen demand soar for alternative investments in the past year, Murphy said. Greater China hedge funds posted the best performance regionally (+8.98% last year, versus +6.26% for Asia hedge strategies, according to Eurekahedge) and saw massive inflows last year, amid the market rally. Net flows into Greater China hedge funds were $2.4 billion in 2015, and $207 million this year, by Eurekahedge data.

For example, Hong Kong-based hedge fund firm Avant Capital Eagle returned 74% across all its funds in 2015. The Greater China-focused manager launched in May 2010, with core strategies of long/short equity and special situations.

But Greater China-based hedge funds a relatively nascent and therefore unsophisticated industry, Murphy said. As of January this year, 44% of Greater China-based hedge funds were long/short equity strategies, 13.11% were long-biased and 11.65% multi-asset, according to data provider Preqin. The remaining 30%-odd was spread among macro, event-driven, value-oriented, relative-value arbitrage, equity market neutral, special situations and others.

The strong flows into Chinese hedge funds may at least partly be explained by the fact that Chinese institutions are among the biggest investors in hedge funds in Asia Pacific. China Investment Corporation, the country’s sovereign wealth fund (SWF), is the biggest hedge fund investor in the region, with $29.9 billion allocated to the asset class; followed by Australia’s Future Fund, with $10.9 billion; and Singapore’s GIC, with $10.3 billion, according to Preqin research dated April 7 (see figure 3).

Murphy said there would be more institutional-quality money and private wealth coming into the hedge fund sector in the region, as these investors seek to diversify their portfolios. But investors are getting smarter and looking at whether the fees they pay will generate decent alpha, she added.

Figure 3: The five biggest Asia-Pacific hedge fund investors
Firm Type Country Current allocation
to HFs ($ billion)
China Investment Corporation Sovereign wealth fund China 29.9
Future Fund Sovereign wealth fund Australia 10.9
GIC Sovereign wealth fund Singapore 10.3
Pension Fund Association Asset manager Japan 4.2
Dai-ichi Life Insurance Insurance company Japan 3.0

Source: Preqin

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