Fri, 02/06/2006 - 07:00
The hunt for investment opportunities and institutional capital is leading many hedge fund managers to expand their strategy range and geographical reach.
A new report conducted by Greenwich Associates in conjunction with Global Custodian magazine indicates many hedge fund managers are leaving behind their single-strategy roots and branching out into multi-strategy organizations.
And, an increasing number of hedge funds are also realizing that uncovering lucrative new trades and appealing to capital-rich institutions might require another major step: geographic expansion.
Around the world, hedge funds are extending their reach as managers in North America and Europe become more active in foreign markets. Many new hedge funds are hanging their shingles in Asia and other promising regions.
'Geographic diversification is not new, but for a growing number of hedge funds this is the next step in their evolution from relatively simple vehicles into complex organizations operating across multiple investment strategies and markets,' says Greenwich Associates consultant John Feng. 'The managers who are most successful in this transition will be well positioned to enhance returns and capture the assets of endowments, foundations and pension funds as they begin to make direct investments in hedge funds.'
These comments are based on the results of a recent survey of more than 1,200 hedge funds conducted by Greenwich Associates in conjunction with Global Custodian. A new Greenwich Report presents the results of this survey, including the findings related to hedge fund geographic diversification, the shift from single-strategy to multi-strategy approaches, decreases in hedge fund leverage ratios, the impact of institutional assets on hedge fund strategies, and hedge fund's use of alternative financing options provided by prime brokers.
Wanted: Diversification and Arbitrage Opportunities
When it comes to adopting a truly global approach to investing, European hedge funds are leading the way. The Greenwich Associates/Global Custodian study reveals that, in addition to the 54% of European hedge funds that invest in the United States, half invest in Japan and nearly 40% invest in the rest of Asia. A quarter of European hedge funds also make investments in Central/Eastern Europe, 16% invest in Latin America and another 15% invest in South Africa.
'The hedge funds that are moving most aggressively into foreign markets are primarily funds domiciled in London that are starting to look to non-US markets and products for arbitrage opportunities in less efficient markets,' says Greenwich Associates consultant Jay Bennett.
North American funds are also moving abroad, although at a slower pace than their counterparts in Europe. About 28% of U.S. hedge funds invest in Asia, including Japan. Approximately 17% invest in Central/Eastern Europe and slightly more than one in 10 invest in Latin America. 'European hedge funds are twice as likely as U.S. funds to invest in Asia - which is probably attributable to the simple fact that, from a time zone perspective, it's much easier to do business in Asia from London than from New York,' says Greenwich Associates consultant John Colon.
Regardless of where they are located, large multi-strategy hedge funds are moving fastest into new markets. Among the more than 1,200 hedge funds participating in the Greenwich Associates/Global Custodian survey, more than a third invest in Japan, slightly more than 30% invest in Asia excluding Japan, approximately 12% invest in Latin America, almost 20% invest in Central and Eastern Europe and 8% invest in South Africa.
As hedge funds move into new regions like Asia, they are not limiting themselves to blue-chip investments or large, liquid markets. In particular, big multi-strategy funds are developing a considerable appetite for emerging markets - the fastest growing hedge fund investment strategy over the past 12 months. 'The proportion of multi-strategy hedge funds with more than USD 1 billion in assets reporting that they are active in an emerging markets strategy increased from slightly more than 30% in 2005 to 37% in 2006,' says Greenwich Associates Hedge Fund Specialist Karan Sampson.
The impact of this geographic outreach has been felt most keenly in Asia, where proliferating hedge funds are accounting for a growing share of trading volumes in a variety of markets.
As John Feng notes: 'According to the most recent Greenwich Associates Asian Equity Research Study, hedge funds that have established a presence in trading centers such as Singapore and Hong Kong generated 30% of the total institutional equity commissions in 2005, up significantly from the previous year.'
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