Returns, new rules fuel hope for Aussie hedge funds

Hedge funds look set to become the fastest growing segment of Australia’s asset management market, according to industry association chairman Paul Chadwick.

The hedge fund industry saw its market share of Australia’s fund management AUM increase from 3.1% in 2012 to 4% last year, according to a survey released by the Australian Securities and Investments Commission (Asic) in July.

That compares with a decline for public (retail) units trusts (from 12.7% to 12.3%) and life insurance AUM (from 11.98% to 11.8%). Only superannuation fund AUM of total managed funds rose, from 73.4% to 74.3%. But some of that was allocated to hedge funds.

“Subdued equity and debt markets are setting an extremely positive backdrop for hedge funds to become the fastest growing segment,” suggested Chadwick, who chairs the Alternative Investment Management Association (Aima) in Australia.

Australia-based hedge funds gained 9.82% in the first seven months of this year, before declining 0.11% in August, by eVestment figures.

Eurkehedge’s Australia/New Zealand hedge fund index is up 6.51% in the first eight months of this year. That compares to 1.36% for its overall hedge fund index. Its return is higher than for Eurekahedge’s Asia ex-Japan (4.45%), North American (0.31%) and European (4.36%) hedge fund indices.

Strong performances have been seen across strategies. Laminar Credit Opportunities Fund is up 7.65% over the past 12 months, for example, while Wilson Asset Management’s Australian small-cap fund rose 25.4% over the same period.

Chadwick acknowledged that growth was coming despite muted institutional demand, which he blamed on the fee debate among Australia’s superannuation community.

He suggested this had become warped by a misinterpretation of MySuper rules that task fund trustees with ensuring external managers provide value for money. This has been widely interpreted by super funds to mean low fees.

But Chadwick said he saw an opportunity emerging for institutional investors to pay more for non-vanilla options amid a build up of in-house teams at superannuation funds focused on managing traditional investments.

In particular he cited alternatives to bank lending as among the innovative strategies coming to market. He argued that alternative credit strategies were difficult to commoditise, unlike alternative beta which had become popular and represented commoditisation of easily replicable hedge fund strategies.

“Local peculiarities are dominating the landscape,” said Chadwick. “A lot of local managers are overlooked by institutional investors. Their fund-raising efforts are more directed at family offices and retail investors.”

Retail investors account for 66% of Australia’s hedge fund industry AUM, according to Asic data. The hope is for more growth from overseas investors following implementation of the Investment Manager Regime (IMR) this June providing tax exemption for foreign entities investing in Australia.

Chadwick acknowledged that investing in Australia-domiciled hedge funds by foreign funds and non-residents had been a minefield prior to IMR, but noted the legislation had introduced tax certainty.

He sees it as a turning point. “It means there are now no material differences [in tax] between operating here and in London or Hong Kong,” he observed.

Victor Jiang said he was among thousands of Australians who moved to the US because the capital-raising ecosystem in Australia was so dire. Yet he returned to Australia from Silicon Valley this year to launch VC fund Sapien Ventures.

Further, two-fifths of funds committed to a A$180 million Australian distressed debt fund Allegro II were raised from overseas investors when the fund closed in June, for example.

Additionally, the number of fixed income-focused hedge funds has surged from 12 in 2012 to 44 last year, although equity strategies still account for about 80% of the industry’s A$97 billion in assets.

Admittedly, new hedge fund launches in Australia have declined from about 30 a year between 2005 and 2011 to less than 20 per annum since.

But the manager of one of those new launches – Bronte Capital – pointed to the sameness of the New York and London hedge fund scenes where “positional crowding...creates charts like Google [flat for a long time, then rocketing up] or Sun Edison [rising for a long time, then rocketing down]”.

The Sydney-based manager argued that “we don’t get to ride the coat-tails of other people’s analysis and that makes us less skittish and less prone to be in momentum stocks” – which is what saw managers around the world flounder in August.