Managers have taken to offering more flexible terms to attract investors to new launches this year amid increased regulatory scrutiny and an acceptance that lack of scale is holding institutions back, say industry players.
Data from Eurekahedge shows the average size of Asia-focused funds launched in the first 10 months of this year was $21.5 million, less than half the $50 million figure of last year. Eurekahedge analyst Mohammad Hassan reflected: “You need $250 million of AUM to be taken seriously."
Even if a large institution wanted to invest in a $30 million fund, the biggest ticket they could write into a fund was $3 million, noted Andrew Williams, CEO of UK-based fund manager City Financial, referencing the 10% limit investors are typically faced with.
Since Asia-based hedge fund managers are situated far from the biggest capital pool – US-based institutional investors – they have tended to be more flexible when it comes to terms than global peers.
As a result they tended to offer side-letters, enabling investors to specify terms not in the main agreement governing such things as liquidity and fees. However, concerns over disclosure have led Hong Kong's Securities and Futures Commission in particular to scrutinse side-letters more closely.
As a result managers launching funds in Hong Kong have had to become more creative about how they structure terms, with one seasoned prime broker pointing to a wide array of partnership arrangements in place this year.
Vasundhara Pradeep, Credit Suisse's Asia-Pacific head of prime consulting, noted how fund launches this year more typically featured separate share classes and co-investment opportunities. Rather than offer different investors different terms in the same fund, the trend has been to offer different share classes to meet investor needs.
An “early-bird” share class has become a common sight, with a lower management and performance fees and a longer lock-up period for the first investors.
“If you want to lock in a key investor, there are two ways – a side letter or separate share class,” said Rolfe Hayden, a partner at law firm Simmons & Simmons. “We are seeing the interests of significant investors addressed through the creation of a separate share class more often. I think that will continue given regulatory concerns, among other things."
Media have cited Pinyin Capital Management as one example of a hedge fund that launched with a separate share class for early-bird investors who committed to the first $100 million. Blue Pool Capital, the family office of Alibaba vice-chairman Joseph Tsai, was cited as one such investor.
Seed capital has also been more commonly used to lure investors this year. Typically, providers of seed capital invest in both the business and the fund, earning a share of management fees charged plus income based on the hedge fund’s performance.
Recent high-profile hedge fund launches involving seed capital have included Blackstone-invested Arkkan Capital Management and HS Group-backed Pleiad Investment Advisors.