This inaugural edition of the Eurekahedge Absolute Return
Fund (ARF) Directory contains information and data on more
than 100 long-only alternative funds managed for absolute
return that represent in excess of US$13bn of assets. These
funds invest in securities domiciled or having primary operations
in Asia-Pacific, inclusive or exclusive of Japan, and Global
Emerging Markets, or otherwise derive significant earnings
from Asia-Pacific, inclusive or exclusive of Japan, and Global
Only within the last three years have long-only ARFs reached
a critical mass in both size and number to gain significant
popularity with institutional investors. Still, the latest
entrant in the single-manager hedge fund universe has yet
to reach a level of prominence on par with most longer established
categories of hedge fund. This directory has been six months
in the making largely owing to the limited recognition
of long-only ARFs.
Like hedge funds that can take short positions, the "long-only"
sub-sector of hedge funds strives to earn 'real' returns for
investors, not merely to emulate or outperform an index benchmark
like traditional long-only mutual funds. Long-only ARFs
are increasingly seen as a practical alternative to traditional
funds simply because they are profit oriented (not relative
return oriented) and are actively managed by seasoned professionals.
This is true for each of the four trading strategies employed
by long-only ARFs.
What are long-only Absolute Return Funds?
A long-only Absolute Return Fund is an investment fund that
takes only long positions, seeks undervalued securities, and
typically has the ability to reduce volatility and downside
risk by holding cash, fixed income or other liquid assets.
This fund may buy or sell options, futures and other derivatives
to reduce or hedge risk and gain exposure for underlying investments
when done for non-speculative or 'classic' hedging purposes.
Exposure may also be gained through investment funds that
are not hedge funds.
Long-only ARFs pursue alpha strategies independent of any
index benchmark that it believes will result in positive returns
whether markets are rising or falling. The key differences
between long-only ARFs, hedge funds and traditional mutual
funds are highlighted in Table 1. Each of these three investment
funds is clearly distinct from one another. However, long-only
ARFs more closely resemble hedge funds than traditional
mutual funds and in fact are a sub-sector of hedge fund.
Absolute Return Funds
|| Hedge Funds
|Objective is consistent positive returns in all market conditions
|| Objective is consistent positive returns in all market conditions
||Objective is out-performance of index benchmark, depends on rising markets for positive returns
|Flexible investment strategies including derivatives but no 'speculation'
|| Flexible investment strategies including active use of derivatives
|| Limited flexibility, generally must be fully invested
|Seldom invests in other long-only ARFs or traditional funds
||Invests in other alternative funds when Fund of Funds
||Seldom invests in other traditional funds
|Leverage used sparingly
|| Leverage permitted, average 1.6:1 (assets + liabilities/NAV)
|| Leverage rarely used
|Mostly open-ended, mostly available to a limited number of qualified institutional investors
|| Mostly open-ended, available to a limited number of qualified institutional investors
|| Generally open-ended, widely available to retail and institutional investors
|Large minimum investment
||Large minimum investment
||Small minimum investment
|Shares or units subject to limited liquidity, normally bought and sold any business day and are required to meet a minimum holding period for redemption but rarely a lock up period
|| Shares or units subject to highly restricted liquidity, can be bought and sold any business day and are required to meet a minimum holding period for redemption but rarely a lock up period
|| Shares or units subject to daily liquidity and can be bought and sold any business day without any notice whatsoever
|Manager's capital often at risk
|| Manager's capital often at risk
|| Manager's capital not at risk
|Fees derived from management fee, manager awarded a percentage of profits
|| Fees derived from management fee, manager awarded a percentage of profits
|| Fees from management fee, manager paid salary and bonus by company
|Highly skilled, experienced and knowledgeable managers
||Highly skilled, experienced and knowledgeable managers
|| Generally less experienced and specialized managers
|Restricted from advertising and marketing
|| Restricted from advertising and marketing
|| Generally aggressively advertised
|Tends to be registered investment
|| Private investment, loosely regulated when offshore
|| Registered investment (US SEC and other authorities)
|Loosely correlated to stock markets and traditional asset classes (diversification benefit)
|| Loosely correlated to stock markets and traditional asset classes (diversification benefit)
||Strong correlation to stock markets and traditional asset classes (no diversification benefit)
|Private placement, usually
||Long and short selling allowed
|| Actively managed
|*Not including passively managed Index Funds (also known
as Tracker Funds)
Funds by Strategy
The most popular investment strategy for long-only ARFs is
Bottom-Up with over half (58%) of all Managers executing this
strategy. The dominance of Bottom-Up, as illustrated in Figure
1, reflects the fact that most managers of long-only ARFs
cast themselves as 'true' stock-pickers, constructing investment
portfolios that heavily favour equities over all other asset
classes. Well behind Bottom-Up yet far ahead of the two least
popular strategies is Dual-Approach at 26%, which typically
allocates outside of equities but has an obvious equity bias.
The Diversified Debt and Top-Down strategies round out the
four major strategies of long-only ARFs at just 10% and 6%,
respectively. ARFs adhering to Diversified Debt are fixed
income funds (although convertible bonds may also be held).
Funds that choose the Top-Down strategy tend to have an overwhelming
debt component within their portfolios but will hold equities
In order for long-only ARFs to preserve capital and achieve
absolute returns, the Manager's expertise is crucial. Like
hedge funds, long-only ARFs are skills-based, relying on the
ingenuity of professionals to analyse securities and make
winning investment choices. Often this means these fund managers
will call upon advanced methods and techniques to pick securities
and markets that will consistently increase a fund's asset
value over time.
To encourage the highest possible positive returns, the incentive-based
fee structure of hedge funds has been borrowed by long-only
ARFs. In particular, the bulk of a Managers' remuneration
is derived from performance fees not management fees which
range from 0.5% to 2% of NAV. Before any performance-related
income is forthcoming (typically 20% of NAV or less), fund
returns are often required to reach a High Water Mark. About
55% of long-only ARFs in the directory have a High Water Mark.
A Hurdle Rate or targeted minimum gross return is also present
in about 35% of funds.
In addition, because long-only ARF Managers frequently have
a personal financial stake in the funds they manage, they
are less likely to take unnecessary risks. This moral-hazard-reducing
practice also originates from hedge funds. It is often the
case that the more of his own cash a manager places in his
fund, the greater the likelihood the fund will deliver above-average
Funds by Physical Location of Manager
In the age of instant telecommunications, it is no surprise
that long-only ARF managers can reside practically anywhere
in the world without regard to distance from markets.
Nevertheless, more than one-quarter of all managers choose
to live in the United Kingdom (30%), and then mainly in London.
The pronounced affinity for London in particular and the UK
in general is a function of, first, that the UK has the largest
concentration of hedge fund managers found anywhere, which
serves as a magnet for talent, second, UK financial markets
are efficient and supported by a well-designed regulatory
infrastructure, third, a large majority of the world's alternative
investors are located in the UK so it is easier to attract
assets, and fourth, managers find the London lifestyle to
their taste. The upshot is that the UK's overall environment
is ideally suitable for sophisticated investors and the entire
spectrum of hedge funds.
Since the beginning of the new millennium, however, both
the Hong Kong (25%) and Singapore (7%) fund markets have been
gaining favour with professional money managers. The financial
and supervisory authorities in these Asian cities seek to
encourage and promote the development of home-grown hedge
funds. These markets look to the UK's lead. Recent trends
suggest that the number and variety of funds and the talent
pool in both Hong Kong and Singapore will deepen this decade.
The remaining long-only ARF Managers are thinly spread out
in Europe, Australia and Asia, as shown in Figure 2.
Funds by Investment Geography
For this directory, the region where a fund's strategy is
executed, called Investment Geography, is limited to all countries
worldwide with the exception of member-states of the G7 minus
Japan. This broad swath encompasses Asia-Pacific, Global Emerging
Markets and Japan, but excludes most European markets and
Investment Geography is one of the first important considerations
for investors of mutual funds, including hedge funds. As Figure
3 illustrates, well over half of long-only ARFs in this directory
invest in Asian markets. Asian securities bought and sold
in Asia ex Japan capture 23% or nearly one-quarter of the
Investment Geography pie, while Japan is a close second at
Other Emerging Markets and Single Country each occupy 14%
of Investment Geography.
* Australia, India, Indonesia, South Africa, South Korea,
Overall Assets vs Manager Location
From Figure 4, it is evident that the preferred locations
for managers - UK, Singapore and Hong Kong - also gobble up
the lion's share of overall assets. To be precise, as at September
2003 a combined US$8.8bn or roughly 80% of total assets under
management (not including US$3bn worth of 'limited information'
funds) was allocated within these three money centres.
Interestingly, USA and Japan account for a relatively minor
amount of capital under management. Certainly Managers in
the two largest economies in the world can attract large-scale
investors but as Figure 4 shows, the amount (less than US$200m)
suggests that the tap has yet to be turned on. In the case
of Japan, however, the unimpressive size of assets onshore
is more about the stultifying regulatory environment surrounding
hedge funds than domestic interest in long-only ARFs. Consequently,
most Japan-only funds are managed outside Japan.
A wide range of Administrators provide back office functions
such as accounting, valuations, transfer agency and custody
services to funds with long-only absolute return strategies.
Hiring the right Administrator - one that will work closely
with clients and provide regular feedback - allows managers
to concentrate on their trading activities.
The total number of different Administrators used by fund
managers within this directory is quite high at around 35.
The Investment Advisor can act as a fund administrator although
few do. The three most popular Administrators account for
about 40% of market share, based on the total number of funds.
The chief player is Bank of Bermuda (which was acquired by
HSBC in October 2003), and its subsidiary Bermuda Trust. Not
far behind are International Fund Managers and HSBC, respectively.
Depending on the complexity of the structure of the fund,
the Administrator's fees could range from just a few thousand
dollars a year to as much as 0.25% of the NAV per annum. Sometimes
the Administrator's fees are included within the management
fee. Custodial fees are more difficult to quantify but can
also be a lump sum or a percentage of NAV.
From a practical standpoint, long-only alternative funds
do not require the heavyweight financial services and market-making
muscle of a prime broker. Nearly all long-only ARFs implement
their strategies and execute trades through several brokers,
including smaller-sized intermediaries.
Long-only ARFs typically never borrow equities and other
securities. They do not speculatively short and therefore
do not need to leverage extensively. Their derivative use
is either restrained or non-existent. What's more, average
transaction size and frequency tends to be less than that
of run-of-the-mill hedge funds. Brokers employed by long-only
ARFs also typically do not act as custodian; the Administrator
performs this task and can also settle all transactions. And
of course, not having a prime broker means long-only ARFs
do not pay prime brokerage fees.