We asked 16 managers, based around the world and overseeing absolute return Asia Pacific strategies, their views of where is the best location to establish a hedge fund. We gave each of them the same 12 questions (reproduced below), which centered on the investment process and capital raising. Their answers were remarkably similar, suggesting that there may be a clear formula which new, and arguably some established, managers should follow.
The main conclusion that we drew from this exercise is that two offices are ideal per hedge fund, one in New York or London to raise capital, and one in an Asian time zone to run the money, or at the very least execute the trades.
Why is it important to have some investment management presence in the region in which the fund is invested? As one Tokyo-based manager puts it, "imagine running a US equity hedge fund from South Africa and not speaking a word of English. How could you do it?"
Only four of the 16 managers specifically answered that location was not important to the management process, one of whom runs a model-driven market neutral strategy, with the manager commenting that "we have no need to see the chairman of Sony in order to make our investment decisions". Two others, oddly enough, do have material representation in Asia, while the fourth is considering hiring someone in Tokyo.
Looking at the responses another way, of the five managers with main offices in New York and London, two also maintain significant presence in Asia, while two others would like to employ someone in the region, one of whom specifically would like to hire an analyst.
And, of course, there is the not small issue of quality of execution. One Hong Kong-based manager was blunt: "we do not like to give brokers discretion in time zones where we cannot watch the market ourselves." A New York manager, with an Asian-based trader, commented that "unquestionably, trying to trade a market where time zones are drastically different would hamper anyone's ability to perform relative to performance with a local presence." (Note that the issues raised in our electronic trading survey, included in this month's edition of the Eurekahedge Monthly, may in time render this obstacle obsolete.)
Why is it best to also have a base in New York or London in order to raise money for Asian strategies? Even the Asian-based managers admitted that most or all of their assets came from the US or Europe, the exception being for Australian funds which have mostly sourced capital locally.
Furthermore, only the New York, London and Tokyo managers gave an emphatically positive response to our question asking 'how does your location affect your ability to raise assets?' Having said that, the Tokyo managers raised most of their funds from Europe and the US, and only a small proportion from Japan. The conclusion here is that Tokyo-based managers have greater access to Western asset allocators, than managers located elsewhere in the Asia Pacific.
As background, the 16 surveyed managers were approached on a confidential basis. In the hedge fund world, location can be a touchy subject. We endeavoured in our questionnaire to define location in the conventional sense, that is, where most of the physical operations are situated, whether that be at the representative or management office. By this definition, the surveyed managers are spread evenly around the world, either in New York, London, Hong Kong, Singapore, Tokyo or Australia, as shown in the following table.
Location Profile of Managers Surveyed
|City||Representative or Management office|
|Sydney or Melbourne||
The following are the questions we asked the surveyed hedge fund managers:
- Where do you manage your fund from?
- Why did you choose to manage your fund from your current location(s)?
- If you are not located in the markets in which you invest, how often do you travel to these markets? Do you work Asian hours?
- How does the location of your business affect your investment behaviour (ie: trade more or less frequently, more or less dependent on third party information sources, influenced the investment strategy chosen, etc)?
- How does your location affect your ability to access company management? Is this important to your investment strategy?
- Do you believe that being in a nearby time zone as a securities market helps or harms investment performance? Why?
- How much assets under management did you have at the end of April?
- Are your investors mostly in the same or nearby time zone as your main office?
- How often do you travel to meet existing or potential investors?
- How does your location affect your ability to raise assets?
- Overall, do you think location is a significant factor in the success or failure of running a hedge fund? Why?
- Do you have any other comments about this issue which you think are important for me to consider?