Key trends in Asian hedge funds

The Asian hedge fund industry is still in its infancy, but the last twelve months have been a period of hectic growth. We expect dedicated Asian hedge fund assets to grow by 40% this year from US$14 billion to US$20 billion. The increase will comprise an estimated US$5 billion of net new money and US$1 billion through performance. In addition, we estimate that managers have a further US$4 to 5 billion of hedged strategy assets in managed accounts. The number of funds is likely to increase from 160 in January 2002 to 250 by the year-end.

Likely development of the marketplace

The Asia-Pacific markets represent 15% of world market capitalisation compared to approximately 40% from the United States. The US markets support an estimated 3,500 hedge funds. In contrast the Asia Pacific region will have 250 by year-end. This discrepancy is more pronounced in Japan, which has close to 10% of world market capitalisation but has less than 75 dedicated hedge funds.

The regulatory environment is changing to the benefit of the hedge fund industry; for example, despite occasional setbacks, the trend in terms of the liberalisation of short-selling rules continues.

Asia currently is a small source of funds for Asian strategy hedge funds and this is unlikely to change significantly in the short term; though the development of dedicated Asian funds of funds and other capital allocators in Asia and outside should further promote single-manager growth.

Latest trends in asset flows to Asian funds

Assets are flowing principally to long/short equity funds, which remains the most popular Asian strategy. This is due mainly to the lack of opportunities in other strategies, a situation that continues to exist in Asian markets.

Funds are derived principally from the US and Europe; Asia remains relatively small - we estimate that less than 1% of the assets in Asian funds are derived from Asia. Inflows are favouring a limited number of funds, our analysis suggest that in excess of 90% of the new money is going to between 10 and 15 of the hedge funds.

Physical location still important

The main centres by number of funds remain London, Hong Kong, New York, Tokyo, Sydney, Melbourne and Singapore. The last 12 months has seen strong growth in the number of funds in each of these centres, Singapore has seen the greatest number of new funds though they are generally small. Growth of assets has been highest for New York and London funds - being closer to the investors still counts.

Start-up activity brisk

Recent success stories such as Ward Ferry in Hong Kong and Speedwell in Tokyo are, we believe, spurring increased start-up activity. The risk to reward ratio between an investment banking career and hedge fund start-up has changed to favour the latter and has also spurred managers on to launching new boutique hedge funds.

However, start-up activity is no longer dominated by new firms; traditional managers are now launching hedge funds. Aberdeen Asset Managers, Global Asset Management, Martin Currie, JF Asset Management and Schroders are a few examples of large asset-management houses launching new Asia-focused hedge funds over the past 24 months

We are also seeing an increase in single-country hedge funds for Korea, Taiwan and India and the return of more macro and currency funds.

There is no slowdown evident in inflows to Asian start-ups. We are currently tracking eighty potential hedge fund start-ups of which we expect 50% to result in the formation of a hedge fund business.

Most funds however remain small, as shown in the following table, with some 25% of funds having less than US$10m. Raising capital remains the most significant problem for new managers to overcome.

Asian hedge fund environment

In conclusion, we view the industry rather like an emerging market, which is developing and evolving. We are seeing increased regulatory scrutiny; particularly in Hong Kong and Singapore. Start-ups are becoming better funded and are exhibiting increasingly professional structures with more focus on risk control. These are all positive signs for longer-term growth.