The hedge fund industry in the Asia Pacific region has experienced considerable growth in recent years. Research indicates that the Asia Pacific hedge fund industry’s assets reached $167.7 billion at June 2007, having risen from only $12 billion in 2000 (AsiaHedge). There are now also estimated to be some 1,100 single hedge funds operating in the region. Although the market remains cautious following the 1997-98 financial crisis, an increasing number of investors, both local and from outside the region, are putting money into Asia Pacific hedge funds. Thanks to growing investor confidence and booming Asian economies, the region is now one of fastest growing areas globally for hedge funds.
Although the Asia Pacific hedge fund industry is a steadily growing one, there a number of differences between Asia Pacific funds and those in the UK and US. One of the most striking is the relatively small size of Asia Pacific funds in comparison with their US and UK cousins. Whereas a hedge fund in the United States might be regarded as sizeable if it is managing US$1 billion plus, a fund in the Asia Pacific region would be considered ‘large’ if it has $100 million or more under management. Roughly half the firms invested in the region manageless than $50 million.
Nevertheless, fund size in the region appears to be on the increase. During 2006 we did not see one $100 million-plus firm, now, one out of five firms we meet manages more than $100 million (these figures include both start-ups and existing firms). Industry research indicates that 48% of Asia Pacific hedge funds managed $50 million AUM or less in 2007 compared with 60% three years ago, corroborating our conclusion that fund size is on the up. That steady progress is being made by Asia Pacific firms is clear: all the more frequently we are encountering hedge funds that started with perhaps only $20 million AUM but have now built up to the $300-400 million mark, having taken roughly three to six years to reach this stage.
In our experience, an Asia Pacific hedge fund making fifty to one hundred trades per day would be considered to have a high volume of trades – the majority of funds are perhaps only making five to twenty trades per day. Clearly, however, the volume of trades depends on the size of the fund: large, highly sophisticated firms may be making many more transactions than the numbers we have indicated.
The vast majority of firms we come into contact with are pursuing long/short equity strategies and over half (55%) of all Asia Pacific hedge funds are invested in long/short equity (EurekaHedge /GFIA).
Nevertheless, we are seeing a number of firms trading equity swaps, CFDs, futures and options, a small amount of OTC, plus a few funds trading credit derivatives and fixed income. The latter group (ie. those trading credit derivatives and fixed income) are limited in number and likely to remain so, given the global credit crisis. Despite the traditional emphasis on long/short equity, Asia Pacific firms are gradually beginning to branch out into more diverse strategies. Interest in multi-strategy has grown, for example, with investment in this area rising from less than $4 billion in mid 2006 to $12 billion in June 2007.
In general, there appears to be a limited interest in complex derivatives – of course derivatives are traded, but in our experience those that are traded tend to be of a pretty standard type. Although this situation will eventually change, it is likely be a slow process as the market is far from saturated and there are currently a wide range of equities, bonds and so forth, in which funds can invest. Indeed, if a fund is able to buy into a Chinese company and see it rise 30% in 6 months, why would it be tempted to bother with trading complex derivatives? Having said that, as more money flows into the region and the number of easy opportunities diminishes, funds will have to revise their attitudes towards derivatives.
Hedge funds in the region are also becoming more technologically and operationally sophisticated as they adopt increasingly varied strategies and carry out greater volumes of trades. In addition, the growing amount of cash from institutional, European and US investors flowing into the region is having an impact and funds, keen to attract investors, are realising the value of putting formalised procedures in place as well as creating more robust technological infrastructure. And it is not just established firms that are making this type of investment: start-ups are also beginning to understand the need to put formalised procedures in place, from the outset, if they are to attract (particularly) institutional investors’ cash.
Start-ups are growing in number. According to research by EurekaHedge sixty-five new funds came to the market in the first half of 2007 alone. Many of these firms are a good deal smaller than their cousins in US and Europe and it is not unusual for an Asia Pacific fund to start with assets of less than $10 million: in the US or the United Kingdom, a hedge fund with less than $10 million AUM would not be able to find a prime broker.
Change does appear to be on the way, however. We have recently encountered a small, but increasing, number of start-ups at the $100- $300 million level, although we have yet to meet a $1 billion start-up in the region. Despite the small size of some start-ups, these firms are not losing out to larger players as might be expected. It appears that at least for the present, sufficient market exists and enough investment opportunities abound to sustain firms of all sizes. Indeed, experienced managers founding start-ups, which are often offshoots of other, larger funds, have little trouble raising capital. Like their established counterparts, start-ups show a preference for long/short equity strategies.
Interestingly, a considerable number of hedge funds investing in the Asia Pacific region are located outside it and more investment is made by hedge funds based outside the region than by those within it. Industry findings indicate that the US is currently the largest Asia Pacific invested location ($39.1 billion) while European and UK firms have put some $23 billion into the region (AsiaHedge).
While some US and UK firms trade Asia Pacific strategies from premises based outside the region, a number of well established hedge funds have chosen to set up local offices. These funds tend to be sizeable and often trade complex products rather than simply long/short equity.
Despite the credit crisis, the Asia Pacific hedge fund market appears to have held steady during the latter half of 2007. It has been suggested by some commentators, that Asia Pacific hedge funds’ tendency to focus on equities rather than complicated debt instruments may have proved to be a saving grace. Looking at it from a technologist’s perspective, if Asia Pacific hedge funds’ willingness to invest in technology can be taken as an indicator of the health of the sector, then 2007 was a robust year, despite the upheavals affecting wider financial markets.
On a rather less optimistic note, as we enter 2008, rumours are circulating that US investors may be waiting till 2008 to make redemptions so as to cover losses in the States. As a result, Asia Pacific funds are taking a cautious approach as the New Year begins.
Tony Swei is CEO of hedge fund technology provider Tradar which opened offices in Hong Kong in 2005. He works with a wide range of funds operating in the Asia Pacific area.