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Opportunity knocks for hedge fund services

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As fast as hedge funds spring up to capitalise on the investment opportunities available in Asia’s dynamic and fast-growing markets, they are being shadowed by providers of services to the industry

As fast as hedge funds spring up to capitalise on the investment opportunities available in Asia’s dynamic and fast-growing markets, they are being shadowed by providers of services to the industry that see in the region a potential for growth that is not necessarily available in the more mature markets of Europe and North America. Singapore and Hong Kong are the main beneficiaries as prime brokers, funds administrators, capital introduction specialists and others establish a presence on the ground to meet demand for their services that is being fuelled notably by the appetite for exposure to Asia of Western  institutional investors.

However, one should not discount the importance either of the developing wealth within Asia itself, which is set to create demand for alternative products in the future, e en if at present soaring stock markets make it hard to persuade some investors of the diversification benefits that hedge fund investment can bring particularly in a less propitious economic climate.

‘The rich in South-East Asia are just as rich as they are anywhere else,’ says Dermot Butler, chairman of Dublin-based Custom House Administration, which set up an operation in Singapore earlier this year. [Hedge fund investment] may take a little time to get going, because while the markets the main growth area for the global hedge fund industry over the next five to 10 years. At present Asia may still be small in terms of numbers compared with the US and Europe, which are much more mature, but this region is now experiencing exponential growth.’

PerTrac Financial Solutions, the leading provider of asset allocation and investment analysis software to the alternative investment industry, has had clients in Asia for many years, both among fund of hedge funds managers and investors such as large financial institutions, family offices, foundations and endowments, and recently opened an office in Hong Kong to add to a partnership arrangement that provides client support in Japan.

Says president and chief executive Gerry Mintz: ‘We’ve steadily grown our business in Japan, where we effectively we have two people on the ground to offer support in the local language. Elsewhere in Asia we have seen increasingly strong growth in the business from investment-side clients not only in the main markets of Hong Kong, Singapore and Australia but elsewhere. We have users ranging from small family offices to state pension schemes such as that of Singapore.’

Mintz says the firm is seeing synergy benefits from its acquisition just over a year ago of Whittaker Garnier, provider of a market-leading customer relationship management application. He says: ‘A lot of things prompted us to open an office in the non-Japanese part of Asia. One was the number of hedge funds springing up, which would need tools to present their performance to investors and benchmark themselves against their peers. There was a natural market there for PerTrac, but also for the Whittaker Garnier CMS product, because they’re raising money from investors.

‘Capital introduction groups and prime brokers that use the product globally are building up their Asian presence and would benefit from having local  support. We also have clients from the Asian region who are using both PerTrac Analytical and CMS in combination to improve the productivity of what is often a relatively small branch office and connect them with what their colleagues are doing around the world.’

He can see further expansion in the region in the future as the business develops. ‘It will take years to develop the market, and we’re in it for the long  term,’ Mintz says. ‘From a development perspective we will look at things like when it might be appropriate to have an office in Sydney, for example. What will the market look like in countries such as mainland China? Will we need to have people on the ground there, or will it be a market where hedge funds just send people in to do research?’

Kevin Meehan, head of Asia-Pacific prime services coverage with Credit Suisse in Hong Kong, notes that it is a mistake to view Asia as a single market on the lines of the European Economic Area. ‘The big thing in Asia which is different from the US and Europe is that you have to interact with 14 or more distinct markets, each with their own regulatory issues,’ he says.

Meehan says that diversification is one of the key characteristics of the hedge fund industry in Asia today. ‘In 2006, the fastestgrowing strategy in Asia was multi-strategy,’ he says. ‘We are also seeing some managers looking to have a proportion of their portfolio in less liquid assets, through a side-pocket in a convergence of hedge funds and private equity. Many are looking to the private markets, pre-IPO, and are looking to invest in positions earlier.

‘Managers are also looking to diversify into other markets, such as Vietnam and Pakistan, two markets that we can now provide that not all market  participants are  able to. The appetite is not only for different types of asset class but also to have derivative exposure to broader markets.’

Derivatives are particularly important in Asia because of the difficulty in accessing certain markets, Meehan says. ‘The prime brokers that have done well are those that have strong derivative platforms. One of the things we’re seeking to do on the derivatives side is to create a one-stop derivatives shop within prime services. That will enable us not only to put together vanilla derivative products but create and tailor derivatives to give clients access to particular products either through an individual stock or through a sector type of swap, index, future or option.’

A decade ago, a number of Asian countries took the opportunity to blame hedge funds for the region’s economic and financial crisis, but today, Meehan believes, there is a more mature and balanced view of the role hedge funds play, particularly among the region’s supervisory authorities. ‘Regulators are probably more likely these days to be in contact with other regulators, not only within the region but those who have experience with hedge funds in other regions, such as Europe and the US,’ he says. ‘I suspect there is much more open dialogue between the regulators in Asia and those in jurisdictions that freely permit hedge funds to trade, and are able to share those experiences with supervisors that currently do not permit them or are reviewing their

Stuart Farr, chief executive of Beauchamp Hedge Fund Solutions, says: ‘One trend we’ve noticed recently is that Asian managers are ramping up to create absolute return institutions as opposed to  just hedge funds. There’s a big base of long-only investment, but the hedge fund market is taking off and as a result, the idea of mixing these two types of asset is not considered ridiculous, whereas it’s taken a few years for US and UK pension fund investors, for example, to get their heads around alpha, the concept of absolute returns, and whether hedge funds are really risky.’

He adds: ‘Electronic trading is also taking off in Asia, as everywhere, but in the past six months we’ve seen a marked uptick in interest in electronic trading, and the concept of straight-through processing is starting to take off. They don’t need to go through the whole laborious process that everyone else
has taken to get there – there’s no need to reinvent the wheel.’

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