Three trends in the Asian hedge funds industry should prove to be of particular note to Prime Services providers during 2006.
These trends are: the continued growth in assets employed by hedge funds in the Asian space and the number of funds employing them; the increased sophistication of funds both in terms of breadth of activity and complexity of products they require, and finally, the continually changing and challenging regulatory environment unique to the Asian region.
Firstly, the growth in assets employed in the region, across all strategies, has been impressive in recent years, rising from USD 16bn in 2000 to USD 90bn in 2005 according to Eurekahedge. Also during that period, the number of single manager funds dedicated to Asian markets has grown from approximately 180 to 650 (Eurekahedge).
There are around forty hedge funds based in
Europe or the US that have opened offices in the region, ranging from research hubs in low cost countries to substantial operations with local portfolio management and trading capabilities. Investors continue to be increasingly interested in equity focused offerings.
Despite that growth, Asia Pac hedge funds still make up a smaller proportion of the world's hedge fund market cap than the capitalisation of the regional markets might indicate. Most commentators expect this gap will continue to narrow through 2006, placing pressure on Prime Services providers to expand their coverage capabilities.
The second key trend is the increasing sophistication of hedge funds in the region in terms of accessing new asset classes and growth opportunities outside the more traditional long/short arena. This follows the dual trends seen in the US and Europe of funds aggressively targeting alpha in areas such as private equity, and in utilising far more structured product solutions beyond traditional equity asset classes. This requires a more integrated approach from Prime Services providers drawing on a range of asset class and product offerings across their platforms - in effect acting as the gateway into their firms for hedge fund clients.
Finally, from a regulatory perspective, Asia remains a challenging environment in which a Prime Services provider must operate. The regulatory regimes of the numerous markets in the region are developing at differing rates driven in large part by domestic concerns. Similarly, the various regulators have differing levels of familiarity with the hedge fund industry. Although it is possible to say that at a macro level the changes seen in 2005 were broadly positive, the large number of jurisdictions in the region ensures that providers will be kept on their toes through
By Greg McCafferty, Managing Director, Prime Services & Synthetic Equity, Deutsche Bank, Hong Kong