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Hedge Fund Monthly

Long-Only Houses Are Developing a Taste For Asian Hedge Funds
Niall Shiner, Eurekahedge
March 2002

A closer look at our recently produced directory showed that more than 1 in 10 of the funds covered were actually hedge fund offspring of traditional long only houses. Looking into the pipeline of hedge funds, we were surprised to see that this figure actually rises to around 1 in 7, although it has to be admitted that there is a bias to the “it is our intention to launch” camp, as opposed to those with a firm timetable. There are several factors explaining this trend:

  • Investors increasingly want absolute return, non-correlated products.

  • Hedge fund investment has historically been the preserve of the wealthy, a market in which long only management companies have been slow to enter.

  • The best long only fund managers are increasingly starting their own hedge funds.

  • The standard 2% management and 20% performance hedge fund fee structure translates into a 5-6% net fee, assuming 15-20% annualized returns, whereas long only mandates are priced as low as a tenth of that.

  • The trend towards indexation on long only money is driving down fees and making personnel resources increasingly redundant.

The path that the long only houses have taken to set up their hedge funds is similar.
Rather than take over an existing hedge fund and re-launch it, they have on the whole taken one of their better known long only managers, created an independent cell within the larger organization, seeded it, added a risk management system and launched it. Interestingly, in all cases, they have used the brand of the long only firm for the hedge fund.

The major problem facing these companies is how to incentivise the manager. Self-employed hedge fund managers are motivated by personal remuneration and the desire to escape the bureaucracy of big organizations. Most long only houses get around this by offering a guaranteed salary and then some kind of profit share. Simplistically, the split tends to be the entire management fee to the house, and a 50:50 split on the performance fee. There are often bells and whistles attached with the percentage changing depending on who raised the money, the manager or the house. There is sometimes a charge to the manager for pooled research and other corporate overheads employed. This sort of structure does, however, create 2 further problems:

  1. Friction between the hedge fund team and the remaining long only managers who are not on similar incentive packages.

  2. The temptation for the manager to use his time at the long only house to build up a performance track record and shorting experience with a view to jumping ship to a genuine hedge fund when the opportunity arises.

There is also the broader issue of how to grow a hedge fund within a long only business without cannibalizing the core business. If the managers want to run hedge funds, the marketing people want to sell them and customers want to buy them, who is going to look after the core long only side.

It is probably too early to reach a conclusion on the likely success of this strategy, although the odds are probably in the long-only houses favour. The major reason is that the long only houses have marketing expertise and muscle. They are getting into hedge funds because they already know which of their current customers are looking to build their exposure to the asset class. The record of the early entrants, furthermore, supports this conclusion, as the following table shows:

TABLE
Name of Investment Manager Fund Name * AUM
(US$m)
Inception
Date
JP Morgan Fleming Asset Management Nippon Neutral Fund 400 Apr-94
Henderson Global Investors Ltd Henderson Japan Absolute Return Fund 244 Jul-00
Gartmore Investment Management PLC AlphaGen Hokuto Fund 212 Nov-00
Nomura Asset Management Japanese Equity Market Neutral 200 1998
Global Asset Management GAM Japan Hedge Fund 192 Jun-98
Martin Currie Investment Management Ltd Martin Currie Absolute Return Japan Funds 134 Jun-00
JF Funds Ltd JF Asia Absolute Return Fund 127 Sep-89
Gabelli Asset Management Gabelli Japanese Value Partners Fund 110 Feb-02
Gartmore Investment Management PLC AlphaGen Pictor Fund 102 Jul-02
Oechsle International Advisors LLC Oechsle Asia Pacific Offshore Fund 90 Jun-95
Oechsle International Advisors LLC Oechsle Nippon Offshore Fund 50 Jul-99
State Street Global Advisors Long-Short Market-Neutral Japanese Equity Strategy 35 Apr-02
AXA Rosenberg Investment Management Ltd Japan Market Neutral Fund 30 May-02
Henderson Global Investors Ltd Henderson Asia Pacific Absolute Return Fund 20 Nov-00
JF Funds Ltd JF Macro Absolute Return Fund 17 Sep-90
UOB Kay Hian Advisors Ltd UOB Kay Hian Opportunities Fund 16 Mar-99
Global Asset Management GAM Asian Hedge Fund 7 Nov-02
*Based on the most recent disclosures to us by the management companies, ranging from end-March 2002 to end-December 2001

If you have any comments about or contributions to make to this newsletter, please email advisor@eurekahedge.com

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