A common view of Asia's hedge fund industry is that it lags a few years behind its counterparts in the US and Europe. However, there is plenty of evidence that the sector is maturing rapidly and that Asian hedge fund managers are quickly making up the ground on funds elsewhere in the world in terms of size, sophistication of strategy and the solidity of their operational infrastructure. One of the clearest signs of this rapid development is in the diversification of strategies employed by hedge fund managers in Asia. Whereas equity long/short until recently accounted for as much as 80 per cent of hedge funds in the region, that proportion is decreasing with the emergence of more fixed-income, quantitative and multistrategy approaches.
This broadening of strategies brings its own challenges for prime brokers, particularly managers adopting a multistrategy approach who are seeking strong equity, fixed-income and derivatives platforms, and for whom the most important priority is that their funds are able to trade and be cross-margined, reported and serviced across asset classes. At the same time, Asian hedge fund managers - like their counterparts elsewhere in the world - are developing better infrastructure. As managers adopt more varied strategies, trade more complex instruments and require increasingly sophisticated trading and analysis tools, institutional investors in particular are insisting that managers put in place the resources to manage their day-to-day operational issues, leaving the investment specialists to focus on delivering performance.
Some prime brokers have been able to assist this process by providing technology platforms to managers, helping to relieve the burden of costs on start-up operations. While a few allow managers to use their in-house trading systems, which effectively restricts the managers to trading with that counterparty, others - like Credit Suisse - offer best of breed third-party open architecture systems, from front-end trading execution to risk management and real-time P&L, to fund manager clients on advantageous terms. Over the past few years Asia has grown in importance for European and US managers as returns have outperformed other regions and their Asia book has grown as a proportion of their portfolio. In response, many international funds have opened regional offices from which they conduct both research and trading.
At the same time, however, local start-up funds are demonstrably growing in size of assets and number of funds; they are both attracting more assets internationally and becoming more diversified as local managers branch out from their initial specialisation into the multi-strategy arena. This means they are also moving away from the single prime broker model to multiple prime brokerage. They are looking for targeted capital introduction, high-touch client service, more diversified and stable stock loan capability, and a one-stop shop for derivative coverage, and where their original prime broker is less strong in certain markets they are forging new relationships with service providers that enjoy greater access. The development of the hedge fund industry in Asia is clearly moving faster than it did elsewhere because of experience in other regions. Just as second-generation managers who traded Asia from the US, Europe or within Asia have sought-after skills and established track records, global service providers with international knowledge and experience combined with strong local market coverage can add value to both existing and new managers.