Options growing for capital-starved Asian hedge funds

Asia’s start-up and smaller hedge funds face a challenging fundraising and operating environment, but there are a growing number of options available to them, according to industry executives.

“The capital-raising environment is fairly tough for the hedge fund industry as a whole,” says Max Gottschalk, chief executive of fund of hedge fund firm Gottex Penjing Asset Management.

During a panel discussion at the Hedge Funds World Asia conference in Hong Kong yesterday, Gottschalk noted that 90% of inflows to hedge funds on a global basis are going to managers with more than $500 million in AUM.

This leaves little money for small strategies, which comprise the majority of the sector in Asia. Three-quarters of Asian hedge funds had $100 million or less in AUM as of July, according to data provider Eurkeahedge. The smallest funds – those with $50 million or less – run 63.5% of the region’s industry assets.

Panel moderator Steve Bernstein, chief executive SinoPac Solutions and Services, likened fundraising to getting a bank loan, with capital more readily going to those who already possess a large sum of money.

“If you don’t have money, [banks] don’t want to lend you money. That’s the same dilemma for small funds,” says Bernstein, whose fund administration business specialises in serving small Asia-based funds. “If you’re a $30 million fund, it's difficult.”

The trend is due to a structural shift in the industry, as investors have limited resources to perform due diligence on hedge funds, says Gottschalk, leading them to “hover” around the larger and more established hedge funds, which are reagarded as being less risky than their smaller counterparts.

Another reason is due to the fact that hedge funds returns have a fairly high degree of correlation, “so investors naturally are not going to be taking a risk on the smaller managers, when the reality is that the larger ones are delivering pretty much the same returns”, noted Gottschalk.

Fellow panelist David Bridge, associate director at Pacific Alternative Asset Management Company, believes that hedge fund platforms “are increasingly going to be a key stepping stone for smaller funds”.

Such platforms are usually run by banks and asset management firms, which host a number of select hedge fund managers. In return, managers are provided a range of operations-related services, such as back-office support, by the parent entity.

Gottschalk noted that there was very little differentiation between the various platforms in terms of the services being offered to managers.

“The key differentiating factor will be, in my opinion, the ability to help you grow your fund [assets]. It’s all about them being able to look at you in the eyes and say … ‘we’ve got investors in the US that are interested in a particular strategy, so let’s introduce you to these investors.'”

He adds that it would help managers with “the biggest challenge” they now face, which is raising the size of their capital base.

Bridge noted that large investors might play an increasingly bigger role, as they are becoming more open to investing in smaller hedge funds. At the moment, they are mostly the domain of family offices, fund of funds and high-net-worth individuals.  

“Particularly amongst the large institutions, there’s a little bit more willingness to look at hedge funds in the context of providing a solution to their problems, and large allocators have a lot of problems,” said Bridge. “They’re constantly looking to achieve return targets, manage volatility and stay away from crowded trades.”

If small managers can provide unique or tailored portfolios, it would help them to gain access to large investors, added Bridge.

Gottschalk expressed optimism that a turnaround for the sector is in sight. “The Asian hedge fund industry has been stagnant and in decline for the last five years [in terms of net asset flows]. “However, I think we are nearing the end of that cycle and I’m actually very bullish.”

He adds: “So [my] advice for fund managers is, don’t take too much risk, build a track record and money will come back into this part of the world.”