Streets of Asia not paved with gold for many hedge fund managers

By Ellen Sheng
Financial News, Dec. 6, 2010

For all too many hedge fund managers the siren call to go east may not be all it’s cracked up to be. Managers have been heading to Asia in growing numbers in the past year, particularly to Hong Kong.

Recent Asian office openings have included Soros Fund Management, Viking Global Investors, GLG Partners, DE Shaw and Moore Capital.

The managers feel drawn by the region’s heady growth projections, with Asia’s general economic outlook looking sunny compared with that in Europe or the US, and the prospect of escaping western tax and regulatory regimes that look increasingly stringent. Pierre Lagrange, partner and co-founder of GLG, for one, sees Asia as a bigger threat to London’s ability to hold on to hedge fund business than Switzerland.

Looking to capitalise on the sentiment, state representatives from the Hong Kong Monetary Authority recently visited London on a campaign to draw bankers and portfolio managers to the former British colony.
However, if recent history is any guide, managers may end up disappointed.

It was only two years ago that European and American hedge funds were leaving Asia in droves, retreating to the apparent safety of their home markets during the credit crisis.

Citadel Investment Group, Ramius and Tantallon Capital Advisors were among those that closed or pared back offices in the region. The same has happened on several occasions in the past, making it hard for Asian investors to have faith in the staying power of foreigners.

It didn’t help that Asian funds have tended to focus on equity long/short strategies and continue to do so. These performed badly in 2008 and investors reacted by pulling out. The region’s budding hedge fund industry suffered high redemption rates.

The redemptions also disrupted prime brokers, several of which were forced to downsize.

Ben Williams of equity financing sales in the prime broking division of Bank of America Merrill Lynch said: “Some of the sovereign wealth funds in the region have been somewhat active in allocating to hedge funds.”

Asian fund launches did pick up in the first half of this year, with the total number of funds rising to 1,278, topping the 2007 high of 1,240, according to Singapore-based fund tracker Eurekahedge.

But the Asian institutional market for hedge funds is still tiny, compared to that of Europe or North America. The largest market, China, remains closed, given domestic investors are restricted from investing outside the country.

Moreover, industry insiders insist fundraising remains difficult. Total assets under management for the Asian hedge fund industry have barely budged at almost $117bn for most of the year and fundraising was slow last year.

Hedge fund analysts say the prospect of drawing in a new Asian customer base is still way off and one London manager with a Hong Kong office said: “It is impossible to raise money from Asian investors. Local investors have better access to inside information than any foreign asset manager. So they see no point in investing in a US or UK-run Asian hedge fund.”

And for those hoping to escape European regulation, relocating to Asia won’t help much. Funds with European investors will still need to abide by some of the upcoming regulations – something Asian funds have just started to worry about.

This article originally appeared in Financial News. Used here with permission.