Seeding for Asia-focused HFs tipped to surge

Enthusiasm for exposure to China, India and Japan provided impetus for record seeding in 2014 and that is forecast to continue, although it has yet to translate into inflows.
Seeding for Asia-focused HFs tipped to surge

Market commentators are expecting the average value of seedings for Asia hedge funds to continue surging this year after hitting an all-time high in 2014.

It comes amid enthusiasm for investment opportunities in China, India and Japan, which have helped to attract capital to hedge funds focused on those countries.

However, inflows into such hedge funds still appear to be lagging the global average performance, with their share of worldwide assets under management halving over the past 10 years.

Last year saw seven seed deals with an average size of $75 million, noted an executive at Deutsche Bank’s prime brokerage unit. The average size of Asia hedge fund launches in 2014 was just $19 million.

Enthusiasm for Asia-focused hedge funds is underpinned by opportunities emerging in China and India alongside Japan.

Marlon Sanchez, Deutsche Bank’s head of Asia-Pacific prime finance sales, sees Japan strategies attracting the most pronounced demand when it comes to Asia-focused long/short equity strategies.

He added that “the opportunity set for Hong Kong/China and India managers in the fourth quarter of last year outweighed what was possible in Japan”.

Research provider HFR’s India index was up 6.9% in January. By contrast, HFR’s China and Japan indices declined by 0.28% and 2.09%, respectively.

Part of the reason for the surge is that availability of seed capital for Asia-focused hedge funds has only begun to increase over the past year, said Paul Smith, president and CEO of the CFA Institute.

However, the enthusiasm is yet to translate broadly into inflows. Michael Garrow, co-founder and CIO of Hong Kong-based HS Group, noted that over the past decade Asia equity markets’ share of world market capitalisation had doubled while Asia-focused hedge funds’ share of total AUM had halved.

Since the financial crisis, allocators to hedge funds have focused more on consistency of performance and lowered their return expectations. They are no longer looking to the levels of risk often associated with Asia-focused hedge funds.

As a whole, Asia ex-Japan-focused hedge funds delivered the best returns globally in January 2015 – rising 1.65% – according to figures from data provider Eurekahedge. However, another data provider – Preqin – reported that Asia-Pacific hedge funds had gained a mere 0.25% in January.

Over the past 12 months, Preqin found that Asia-focused hedge funds had recorded the second-highest returns (6.8%) of any hedge fund strategy after commodity trading advisers (14.72%).

One of the advantages of attracting seed capital is that it can persuade investors that a new hedge fund has sufficient capital to be able to set up with the proper systems and people in place.

A notable characteristic of Asia hedge fund seedings last year is that all seven involved US-based investors, at least partially. “It will be a slow transition” from the US being the main source of hedge fund capital, predicted Garrow.

Last year Garrow’s HS Sponsor Fund provided seed capital to Pleiad Asia Fund and Zentific Investment Management, which is in the process of raising capital ahead of a planned launch in the second quarter this year. The seeding included capital from US-based private equity firm TPG.

“The appetite for hedge funds is still out of the US,” said Sanchez. “That’s where the bigger pools of capital are. They are looking for exposure to volatile and robust emerging markets, and Asia in particular."

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