KE Absolute, a hedge fund services specialist in Hong Kong, is launching a pilot fund dedicated to investing in early stage Asian hedge funds. The fund aims to take advantage of the superior absolute returns produced by hedge funds in the first two years of their investment cycle, when fund size is low and managers are most driven to perform.
Singapore-based securities house Kim Eng will seed the new fund of funds with its own proprietary capital, but will later open it up to third-party investors.
"There is clearly a niche in the Asian market for this product," says Tom Ashworth, KE Absolute's managing director. "Most fund of funds are fairly conservative, achieving mid-teen returns in a normal year. There is definitely need for a more aggressive product."
Ashworth expects annual returns from the early stage fund of funds portfolio to be at least 20%.
Ashworth says that traditional fund of funds typically miss out on these early stage returns because they require hedge funds to have a track record of 12-24 months before making investments.
"The difficulty most fund of funds encounter when selecting younger hedge funds is that the due diligence process is more qualitative than quantitative. We are in a unique position in that we know the Asian hedge fund community very well and many potential investees are our clients, giving us first hand knowledge of their trading approach and investment styles," says Ashworth. "Most of these managers have a successful track record of generating returns in the region working at other larger institutions before starting off on their own."
In order to avoid the operational risks that exist for all funds before they commence operations the new fund will not invest at the seed capital stage. "We are seeking managers who have raised sufficient capital to launch and have established their infrastructure," says Ashworth.
KE Absolute has already earmarked 15 funds for investment. Ashworth says the fund will aim diversify risk by investing in a range of strategies, and is open to investing in manager locations around the globe, although it is likely there will be a slight bias towards those based in Hong Kong and Singapore. Investment will normally be restricted to 20% of total fund size.
Ashworth stresses clients of KE Absolute's hedge fund services will not necessarily receive preference for investments. "Not all 15 firms we have selected are our clients," he says. "Kim Eng is cash rich. The primary objective of this fund is to achieve a higher return on the firm's capital."
Commenting on the growth of the Asian hedge fund industry, Ashworth says, "The current market conditions are healthy for Asian hedge funds. It will sort the men from the boys, as those market neutral funds with strong risk management practises will go from strength to strength."