The institutionalisation of Asia's hedge funds

The most significant recent development in the growth of the Asian hedge funds industry is that global institutional investors are increasing their allocation to Asian hedge funds. This has helped the industry to grow in terms of assets from about USD74bn at the end of 2004 to close to USD100bn at the end of last year, according to Eurekahedge. This is a very significant increase, and I expect continued growth of at least 20 per cent, which by the end of this year will have raised the volume of assets to between USD120bn and USD140bn.

One important factor is a psychological one - the rebirth of Asia following the 1997economic and financial crisis. Over the past couple of years it has been the key region of the world for investing in growth. Compared with the US and Europe, Asian hedge funds are still relatively small, and obviously the smaller size of the markets limits the size of trades. However, the number of markets that allow shorting or derivative-type instruments is growing all the time, and capacity restraints are lifting in tandem with the development of Asian capital markets.

Institutional investors are coming to Asia in search of higher returns that are no longer available in their home markets. Worldwide, hedge funds have seen increasing allocations across the board as investors have diversified away from traditional longonly products, and alternatives have become a more acceptable asset class than a few years ago. This is promoting an institutionalisation among both investors and managers.

There has been a big focus on operational issues among managers in Asia, who have become more proactive in this regard. Three to five years ago a new hedge fund manager usually consisted of just one or two people, whereas today funds are often setting up with teams of five of ten staff, including an operations manager and a risk control manager. They are focusing on putting the right tools, systems and processes in place, a significant change especially over the past year that's been driven to a large extent by the institutional investors.

For the most part, Asian hedge fund managers have extensive experience either of managing money in-house or working on proprietary trading desks. However, we are now starting to see hedge fund managers coming not just out of the traditional houses but from hedge fund managers that have established themselves over the years and run billions of dollars. These people are now setting up on their own, and are attracting a lot of the money coming into Asia at the moment.

These trends can only intensify as Asian institutional investors themselves start to invest in alternatives. In some cases there are still restrictions, but these are being lifted to a large extent, and some of the bigger pension players in centres like Hong Kong and Singapore, and even Japan, are making allocations to hedge funds.

In Australia, only a small amount of the total funds market has been allocated to alternative investments. If they increase allocations to the level of European investors and US endowments, that represents quite a lot of money. Allocations are still relatively small, but they are increasing quickly, and this is likely to be a major source of new money for the industry in the future.

Colin Lunn is head of sales and client relationship for Asia Pacific at HSBC's Alternative
Fund Services in Hong Kong

 

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