There has been a burgeoning interest from
global investors over the past four years
in the Asian hedge fund space. Newly launched
fund managers with a good business model
and compelling performance are getting above
the critical mass needed to run a business
much faster. Notwithstanding the much-abused
catchphrase 'Asia is hot', the region is
indeed still characterised by information
asymmetries, and an understanding of the
industry's growth and performance dynamics
is not without its benefits. It is to this
end that this write-up highlights some of
the key trends in Asian hedge funds over
the past few years.
The average fund of funds, institutional
and family office investor has realised
the necessity of making trips to Asia to
do their due diligence. This is evident
from the sharp increase over the past year
of European- and North American-based investors
travelling to the Asia-Pacific region. It
appears that global investors have been
underweight in the region for so long that
there is a scramble to allocate to Asia.
This scramble has been increased by the
perceived1 lack of capacity
(usually US$300-500 million) in the average
established Asian/Japan hedge fund.
At the moment, Asia-Pacific markets make
up 15% of the world's market capitalisation
but Asia-strategy funds represent only 6.5%
of the world's hedge funds by assets, up
from 3% five years ago. The robust growth
seen since 2000 (38% per annum growth in
assets), is an indicator that this disconnect
is continuing to close.
Fig 1: Growth of the Industry
Size of Industry
The out performance of Asian hedge funds
relative to their peers in Europe and North
America has been another driver of increased
inflows. The lacklustre performance in US-
and European-oriented funds has meant that
investors have had to look further afield
to maintain the performance of their portfolios.
The graph below shows that Asian funds
not only performed better than the key equity
index (MSCI Asia) but also their global
Fig 2: Index Returns Comparison
There has also been a gradual realisation
that Asian-located funds running an Asian
mandate produce better performance than
funds trading the region from New York or
London2. The recent increase
in the opening of offices on the ground
by large, established US and European funds
shows the realisation that nothing can replace
good, on-the-ground, fundamental research
in the locale. This perception bodes well
for locally based managers.
Understanding the critical path analysis
of forming a hedge fund is vital to the
process of raising money. An outline goes
Finding your partners and sorting out
investment strategy, location and equity
stakes - two months.
Deciding and signing up with a prime
broker, administrator, lawyer and accountant
- two months.
Creating company structure and submitting
regulatory documents - one month.
Getting regulatory approval - this depends
greatly on where you decide to locate
your head office. Hong Kong, for example,
has received much press regarding the
length of time it takes to register. Fund
managers on occasion have had to sit exams
and wait up to eight months for a simple
advisory registration. Singapore, on the
other hand, has a regime that allows almost
immediate initiation of operations.
The quickest we have seen the process completed
is four months, but putting a year into
your timeline is more realistic.
Marketing prior to having a full set-up
is difficult. Without a full set-up, not
only do you jeopardise your relationship
with a future potential client by turning
up with nothing to sell but you can also
fall foul of regulations. Always get good
legal advice on pre-marketing materials
and pitches to investors in various jurisdictions,
especially the US.
However, once the firm and fund is legally
set up, it is best to do a major marketing
trip four to six weeks before the fund's
launch. This allows the manager plenty of
time to still deal with start-up issues
before the fund's launch, as well as for
the manager to meet with potential investors
and collect business cards for the fund's
initial monthly distribution list. Also,
the manager will have little time to meet
with investors in situ for 6-8 months after
the fund's launch - to concentrate more
on performance than marketing. It is important
to be realistic about this pre-launch marketing
trip; it is very unlikely that any investors
you meet will give you 'seed' capital. For
90% of hedge fund launches, Day 1 money
comes from the partners and family/friends.
This should be thought of as an introduction
of the fund to potentially interested shareholders.
On which market to target, the pie chart
below shows the source of funds for Asian
managers as at May 2005.
Fig 3: Source of Funds for
Asian Strategy Hedge Funds
Soft marketing is making sure your contacts
and potential investors are aware of your
initial performance. The contact list and
emails you gather lie at the core of making
sure your potential buyers have you on their
radar screen. It is worth doing some soft
telesales to make sure your information
is going to the correct person and not just
being deleted as spam.
These initial months after launch should
be about one thing for the manager
performance and anything that distracts
you from that is secondary. A manager's
sales skills can dictate success, so if
you do not think this is one of your talent,
it might be well worth hiring or at least
identifying a member of the firm to perform
the marketing function.
Get on Your Bike
Six to nine months down the road is when
the 'harvesting' begins flying round
the world convincing people of your ability
to make money. Mediocre funds can garner
masses of support just by getting on their
bikes and working a group of core clients;
you will not find out who those clients
are unless you visit as many people as possible.
Truly talented managers can languish with
low assets under management for years simply
because they did not run the gauntlet.
The funds that we see growing quickly in
the first year are run by managers with
a proven track record with other firms.
Though the 12- to 24-month rule has slackened
for obviously talented managers, at the
early stage you are most likely to have
investors pledge a smaller amount with an
option to invest more at a later date depending
Allocators do not make decisions quickly.
You should have as many meetings as possible
in your initial hard marketing phase but
expect investors to play the waiting game
for at least six months after the initial
You must be prepared to have due diligence
teams asking you a lot of hard questions.
You should be prepared to visit or be visited
at least three times during the process,
especially from those investors who want
to allocate more than US$10million. Do not
underestimate the amount of time it takes
filling out documents and answering questions
from potential investors.
The good news is that the lack of capacity
in established funds means that more attention
is being given to recently launched funds
with low assets under management. The 'nothing
less than US$40 million rule' is becoming
less prevalent in Asia. There are even 'emerging
manager' funds of funds being launched in
the US and Europe to take advantage of the
perception that new funds perform better
than their older, larger counterparts. Some
of these funds demand an equity stake, but
managers with a proven track record should
be aware that as long as they can hold their
nerves, they probably do not need to go
down that route.
There are a couple of things you need to
figure out before you take the seeder route.
How much of the equity are you willing
to give away.
The common rule for seeders is that the
percentage of equity they request matches
the initial seeding amount. They will
make sure that the performance/management
fees are tied into the vehicle where they
have the equity stake. You as the manager
must feel comfortable with this.
How big can you get before you dilute
If you have a seeder as a significant
shareholder, they may seek to enforce
a size limit so as not to potentially
impact their returns. Their opinions may
not be in line with yours.
Know the best possible structure
for potential seeders from the start.
If you do not put an appropriately regulated
structure in place, you may have to scrap
it at a later date and that can be not
only a serious setback, but also extremely
Be aware that a single initial seeder
can be dangerous since a withdrawal can
spell the end of your business.
Where the Money Comes From
The portion of capital coming from the
North America is growing. It should be noted
Though allocations from North America are
growing, Switzerland is the first major
stop on any marketing tour. Investors in
Geneva and Zurich have more experience allocating
to Asia and an easier regime as far as structures,
tax and regulations are concerned. Swiss
investors also tend to get involved at an
earlier stage than North American investors.
Recent moves by the SEC to increase protection
for US investors and the level of transparency
from hedge funds mean that it is not just
a simple case of investing in a master-feeder
Master-feeder structures have become cheaper
to put in place as more law firms have entered
the Asian market for setting these up. The
real chore may be complying with SEC regulations
on registration. There are further chapters
in this book on the new SEC regulations,
but in brief, if you have more than 14 US-based
investors you will have to comply with the
regulations. This may mean extra headcount
in the form of compliance and risk management
Here is some brutal advice on marketing:
Apart from being one of the top 3% in
performance, money will not come to you.
You have to go and get it, unless you
are among the top five performers.
At your previous asset management or
investment bank firm, everything was done
for you. At a start-up hedge fund, nothing
is and you are on your own.
Keep your presentation short. The 30-page
and 25-minute rule (maximum) applies,
ie. you should have got through your presentation,
which should have around 30 pages, in
25 minutes and move on to questions and
Use the meeting for yours as well as
the allocators' benefit. The questions
that you should get an angle on during
the course of the meeting are:
a. What is their appetite for Asian hedge
b. Within their organisation, how are
decisions about allocation made and what
do you have to do to get a positive decision
on an allocation?
c. When are they next in Asia or when
the follow-up meeting is?
d. Find out what they need (due diligence
questionnaires, references, detailed CVs,
If the allocator asks for further data
or background, write it down and remember
to send it. We continue to be amazed by
how often we hear the refined 'we were
quite impressed by X but they said they
will send us more information and then
we never heard from them again'.
Also be sure to get the investor on
your monthly performance distribution
Go to as many relevant conferences
as possible or have the appropriate member
of the team doing so. Tell your potential
target audience someone will be there
and available for meetings even if you
are at the office.
Remember that even if you do raise
assets quickly, money can disappear as
quickly as it came in if you do not perform.
An increasing number of managers have
the experience of accruing assets in the
first 12 months just to see that money
disappear through lack of performance.
Thus it is important to be constantly
meeting with investors (at your office)
even if they are not in the fund, because
you never know when your AUM may fall.
Don't be afraid to compare notes with
other managers; experience is valuable
Though you will find allocators more favourably
predisposed to your Asian or emerging markets
fund, if you are going it alone, you will
still find the classic evolution pertinent:
Start with US$5 million of partners
and friends' money.
Struggle to get to the sweet spot of
US$75-100 million in 6-18 months.
If performance is good, then a stampede
Within nine months, fund closes at
US$300+ million or whatever the appointed
size and the manager will now be turning
The main thing is not to become despondent
in the first year even if your performance
is fine but you are not raising big money.
Time, effort and performance will make it
insofar as well-known start-ups close very
quickly and this could imply a drying up
of avenues for investors. But the markets
still has a number of long-standing (but
not as well-known) funds, which investors
might not be aware of.
This article first appeared
in a hedge fund and investor guide Eurekahedge
produces on a yearly basis called The Asset
Growth Guide. This book is a free text for
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