Asia’s Small Hedge Funds Woo Millionaires Amid Cash Squeeze

Tuesday, 15 Nov 2011 10:39 AM

 

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Hedge funds with assets of less than $100 million in the Asia Pacific region are turning to millionaires and family offices for investments as institutions favor funds with more than that amount and proven track records.

E Fund Management Co., which in April started China’s first officially registered hedge fund, raised $100 million from the nation’s rich. Singapore-based Iridium Asset Management started trading last year with money from the founder’s family, while Regal Funds Management Pty Ltd.’s eight-month-old quantitative fund is aiming to tap family offices, which make up 40 percent of the Australian manager’s flagship market-neutral strategy.

Europe’s escalating debt crisis and a global economic slowdown have pushed volatility on equity markets to a two-year high, making hedge funds more important for wealthy investors because of their low correlation to market moves. The money from rich individuals and families is keeping smaller managers afloat, as pension funds and other institutions that write bigger checks favor hedge funds managing more than $100 million.

“It is always hard to raise money for new startup hedge funds, but it is generally easier from family offices and private wealth,” said Zhen Liu, managing director of index and quantitative investment at Guangzhou-based E Fund Management. “They are more performance driven and more willing to try out new and novel strategies and managers.”

Startups Shunned

The lack of institutional allocations is hampering the growth of smaller hedge funds. Managers with $50 million or less made up 64 percent of the region’s funds as of August, up from 54 percent in 2007, Eurekahedge Pte said in a report in October. Most of the $18.2 billion in capital inflows since the second half of 2009 went to larger funds, the Singapore-based industry data provider said.

More than 60 percent of institutions seeking to invest in hedge funds over the next 12 months will focus on managers with a track record of at least three years, Preqin Ltd. said. Almost 67 percent of the investors, which include university endowments and pension funds, are considering putting money in those with at least $100 million in assets, the London-based research firm said in a report in September.

Institutional investors made up 61 percent of hedge-fund assets as of the first quarter of 2011 compared with 44 percent in 2008, underscoring their growing importance as a source of capital for the industry, according to Preqin. The greatest hurdle in raising money from institutions is meeting their requirement on the minimum fund size, according to the study, citing managers.

Market Beaters

Among Citigroup Inc.’s ultra-high-net-worth clients, or those with at least $25 million in investable assets, allocations to alternative investments range from as little as 5 percent of clients’ portfolios to as much as 50 percent in rare instances, said Ida Liu, head of North America Asian Clients Group at the New York company’s private-banking unit.

“In uncertain volatile times like what we’re experiencing now, hedge funds may present an interesting investment opportunity,” because of their ability in some cases to benefit from current market conditions, Liu said in an interview.

Asian hedge funds lost about 5.7 percent on average in the first 10 months of the year, according to Eurekahedge. The MSCI Asia Pacific Index declined about 12 percent during the period. The VIX, a measure of market volatility known as Wall Street’s “fear gauge,” rose to 48, its highest level since March 2009, on Aug. 8 following Standard & Poor’s decision to strip the U.S. of its AAA rating.

‘Shakeout’

“The traditional market is going through a shakeout,” said William Chan, chief executive officer of Singapore-based family office Stamford Privee. “It’s a good time to decide which managers would be able to preserve capital during this market turmoil and not show a high correlation to traditional markets like stocks and bonds.”

Stamford Privee, which manages his family’s wealth and that of two others, is seeking returns of 7 percent to 9 percent after fees, Chan said. It plans to invest in hedge funds and has been assessing managers for at least six months, he said.

Almost 90 percent of executive directors at family offices surveyed in the first quarter suggested they were highly likely to put more money into hedge funds this year, according to Rothstein Kass, a Roseland, New Jersey-based accounting and advisory firm. About 85 percent of the family offices surveyed in the study were already invested in hedge funds.

Tailored Investments

Family offices are typically tailored to the families’ investment and personal needs, and often include estate planning, philanthropy and lifestyle management such as maintaining homes and yachts.

About 72 percent of hedge-fund managers overseeing less than $500 million polled by Rothstein Kass in January expected family offices to be an important source of capital. In comparison, among those managing more than $500 million, only about 55 percent shared the view, according to the survey.

A “significant portion” of Iridium Alpha Fund’s initial capital was provided by the family of its founder Jason Wang and extended members who are in media and property businesses. The fund returned about 9.8 percent in September, Wang said.

“Family offices understand hedge funds should not be viewed as short-term investments,” he said. “They are better able to extract value from hedge funds by being more longsighted.”

Main Source

Edwin Ridwan, who has more than 15 years of equity trading and investment experience, including a stint at Jakarta-based PT Danareksa Sekuritas, has been contacted by family offices interested in an Indonesia-focused hedge fund that he plans to start as early as this year.

“Friends and family as well as family offices may be the main source of capital for startup funds and those that are smaller than $100 million,” Ridwan said.

Having raised its initial capital from individuals, E Fund Management, China’s second-largest asset management company, in October started marketing its multi-strategy hedge fund to overseas institutional investors, said Liu, who had previous stints at Brevan Howard Asset Management LLP and D.E. Shaw & Co. E Fund China Absolute Return gained 4 percent from April through September, outperforming the 19 percent decline in the Shanghai Composite Index.

“Larger institutions are more constrained by their investment process and consensus building and tend to invest in more established hedge funds,” Liu said. “We have some positive feedback but there is much more work to be done.”

Regal Funds

Stephen Baldwin, who runs a quantitative strategy at Sydney-based Regal Funds Management, plans to raise money from family offices as well as fund of funds. The Regal Asian Quantitative Fund started with $25 million from the Australian firm, which manages a total of about $1 billion.

“Typically, we find that family offices can often be more interested in investing in early stage managers, which is promising given that our assets under management are not very high in this product,” Baldwin said.

About 40 percent of the money invested in Regal’s flagship Amazon Market Neutral Fund comes from family offices, 40 percent from institutions including endowments, and the remainder from fund of funds and foundations, according to the firm.

Reyl & Cie, which manages money for wealthy clients and offers services to family offices, is considering adding Asian hedge funds for the first time to its fund of hedge funds managed out of Geneva, or compiling a recommended list of funds its clients can invest in, said Daryl Liew, head of portfolio management at the firm’s Singapore unit.

Several Asian hedge funds are on the firm’s “radar” awaiting completion of Reyl & Cie’s due diligence, which includes an evaluation of their investment strategy and operational processes, he said.

“Smaller funds now have to cast their net wider in order to attract funds,” Liew said “High-net-worth individuals generally don’t demand an institutional level setup and this makes them a prime target of these smaller hedge funds.”

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