A leaner hedge fund industry will prevail this year, with new hedge funds facing a challenging fundraising environment as prime brokerages and administrators battle to maintain or increase margins, according to Eurekahedge.
The Singapore-based data provider forecasts that the number of fund launches in 2012 will be similar to the 130 launched last year, but down from the 183 new funds seen in 2010. Net inflows are expected to reach $5 billion this year, bringing total industry assets to more than $140 billion by end-2012 – up from the current $125 billion, but short of 2007’s all-time high of $176 billion.
In a bid to raise capital, smaller funds that are launching are likely to offer lower fees than the standard 20% performance fee and 2% management fee, says Farhan Mumtaz, Eurekahedge senior analyst. In 2011, the average fees charged by Asian hedge funds were 18.71% for performance and 1.49% for management, down from 19.08% and 1.84% charged in 2007, when the industry was at a peak.
However, some new funds launched by established and well-known hedge fund managers “tend to have financial backers and also higher fees” than the average, notes Mumtaz.
This year could also see consolidation and some downsizing within the prime brokerage industry as margins come under pressure in a competitive environment. Incomes could be squeezed unless Asian hedge fund assets increase significantly, or prime brokers increase their service charges or provide more leverage, says Mumtaz.
At the end of last year, leverage had reached a near low in the industry, as lenders became adverse to risk, according to one Hong Kong-based prime brokerage executive from a large international bank.
Large prime brokers with a sizable pool of existing clients should fare relatively well, Mumtaz says, but “new prime brokers have not had a very good year in 2011 and we wouldn’t be surprised if they downsize or stop their Asian business outright”.
BNP Paribas, which in mid-2011 announced plans to build out its prime brokerage business globally, had reportedly laid off several employees from its US unit in December, putting its plans to expand in Asia – which it had viewed as a key market – in question. The bank, which employs about 300 staff worldwide for its prime brokerage business, did not reply to requests for comment by AsianInvestor.
Margins are also under pressure with the emergence in the industry of banks such as HSBC, Barclays and JP Morgan, which have committed to shoring up prime brokerage operations in Asia in the past year. However, only two prime brokerages in Asia – those of banks Goldman Sachs and Morgan Stanley – had more than a 20% market share while UBS had 13% as of August 2011, leaving the remainder with less than 10% each, according to Eurekahedge.
Smaller prime brokerages – even those that are a unit of large bank – could face closure, says Mumtaz, as “clients move to larger and more established prime brokerages”.
Hedge fund administrators will also face challenges in gaining margins this year, as their business is directly linked to the size of their clients’ funds. As Asian funds are relatively smaller than those in the US and Europe, it creates a highly competitive environment where administrators vie for the biggest new funds being launched.
“Barriers are very high for new administrators and prime brokerages, as the only clients available are new hedge fund launches, which will struggle to raise assets,” says Mumtaz.
However, those who can weather the environment will gain a foothold in a region that is set for growth. “Asia will always be popular and most agree that whatever happens in the future, Asia will bounce back stronger and quicker than Europe and the US,” notes Mumtaz.