Start-up hedge fund managers have a growing number of options in Asia to help finance their business, including seeders and funds of funds (FoFs), but the bar to entry remains high.

The ones most likely to receive capital from a seeder or FoF, or to be invited to join a platform, are those with the greatest potential to scale up and attract investor capital, argued panelists at Fund Forum Asia in Hong Kong this week.

“In the last 12 months, my team has probably reviewed 200 managers across Asia Pacific,” said Chuak Chan, chief executive of Ascalon Capital Managers, which invests in boutique fund firms in the region. “I aim to do about two deals a year. That’s how tough the market is."

Ascalon typically takes a stake in a manager and also invests in its fund, with a holding period of at least several years. “We need to make sure we get it right,” noted Chan.

His firm has partnered with Asian macro fund RV Capital Management and event-driven strategy Athos Capital.

Aside from a good track record in running a fund or trading, managers need to show seeders and FoFs that they have the potential to scale up in size within a few years. “If there’s an X factor where [we conclude] ‘I don’t think I can raise capital for this person', we’re not going to invest,” says Chan.

Seeders, FoFs and hedge fund platforms typically take stakes in the funds in which they invest, or have a revenue-sharing arrangement with the manager.

Therefore, to realise a return on their investment, hedge funds need to break even and make profits.

The break-even point for managers is about $50 million in AUM, said panelist Steve Knabl, managing partner of Swiss-Asia Financial Services, which runs a fund platform based in Singapore. “Below that mark, it’s just plodding along.”

Institutional investors typically invest in hedge funds that are at least $100 million in size.

“We take as our starting proposition that to have a successful business, you’ve got to have a plan to get to $100 million,” noted Ed Rogers, CEO of Rogers Investment Advisors. The Tokyo-based firm runs a fund of funds and provides seed capital to hedge funds.

Hedge fund managers need to be able engage with potential clients – including those from the US – as part of the capital-raising process. Rogers has turned away prospective seeding candidates because they did not speak a high level of English.

“If you put them in front of 50 US family offices, they [need to] convince these family offices that they know what they’re talking about,” said Rogers. “It’s a very personal sales process. Most [investors] need to meet the managers.”    

It may seem counter-intuitive that the hedge fund managers which would be the most attractive to investors are also the most sought after by providers of seed capital.

Meanwhile, managers need to share their revenues with the seeders, FoFs or platforms with which they partner. So why bother?

“I found it economically cheaper to join a platform, said Roshan Padamadan, portfolio manager at Singapore-based Luminance Global Fund, also speaking on the panel. The global multi-strategy fund began trading on the Swiss-Asia platform in January.

"My platform cost me about 60% of what it would cost if I did it on my own,” said Padamadan, who launched Luminance with $1 million of initial capital. “My economy of scale was insufficient to get a prime broker on my own, but with a platform it is easier.”

“Ultimately why do we want seed money?" he added. "Because we want a degree of certainty with which we can fund expenses.”

Padamadan cites salaries, business travel and systems infrastructure as core costs. “You need working capital.”

The expense of starting a hedge fund in Asia has risen dramatically in the post-crisis era, noted panelists, with stringent rules governing the industry raising operational costs. “The legal, compliance and regulatory burdens on the individual managers when they start up are far, far greater”, said Rogers.