To draw big money, fund size matters
Asia's growth story has whetted the appetites of institutional investors around the world, but they are struggling to buy into the opportunities on offer because of a lack of suitable local fund managers, says HedgeFund Intelligence.
One of the problems investors must deal with, says Aradhna Dayal, head of Asia for the global provider of hedge fund news and performance information, is a mismatch of size.
University endowments in the United States and major pension funds of aircraft companies and carmakers, for example, were enthusiastic about Asia, Dayal said. But they had a struggle trying to invest with local fund managers which were too small for them.
'All of them say that Asia is a long-term growth story and there is no reason why they should not go there. But not even 5 per cent of their portfolio is allocated in Asia, when it should be 10 or 15 per cent,' she said.
'Why? Because it is so challenging to find the right manager on the ground.
'If I am a pension fund, my minimum investment is US$100 million to US$200 million. But a local manager is typically only US$20 million in size. That's too small.'
Reliance on branded names was likely to increase among Western institutional investors who were troubled by the idea of trusting unknown smaller local managers, Dayal said, that were already struggling with increases in business costs owing to a tighter regulatory regime worldwide.
At least 30 or 40 new regulations were going to be implemented in the global hedge fund industry, she said, and smaller firms were likely to struggle to keep up with the speed of the changes and find the time and money required to do all the extra compliance work.
Philip Tye, chief operating officer of medium-size Hong Kong-based hedge fund DragonBack Capital, said institutional investors tended to stick with bigger names in times of market volatility, because they would not want to bear the blame should the investment make a loss.
Smaller players were therefore being edged out, he said, but he was optimistic, too, because that meant there would be more market share up for grabs.
'Good players also stay,' he said.
Hedge funds are also eyeing the opportunities on the mainland, as regulators have decided in principle to allow global hedge funds to raise capital in China, as long as they register in Shanghai and invest the money outside the country.
The access to local capital markets could be a relief to foreign hedge funds that have found it increasingly difficult to raise funds from Western investors since the 2008 global financial crisis, as they could tap into the deep-pocketed mainland investors should they successfully register in Shanghai.
However, Dayal advised foreign hedge funds to be cautious in venturing into new markets.
Many of the so-called private funds that are operating like hedge funds on the mainland have failed in the past few years because of the highly competitive environment and the complexity of the mainland financial markets.
'If even local fund managers find it difficult, how much more so for the foreign fund managers?' she asked.
Big foreign institutional investors, such as the pension funds of carmakers, may not even have this proportion of their portfolios in Asia