- Deep-seated economic fears bringing rise to increased investor demands
- Vibrant Asian hedge fund community, mid-sized funds growing faster than before
- Delayed monies released in Q4 brings optimism in tough fund raising environment
HONG KONG, 12 January 2012 — Andrew Gordon, Head of BNY Mellon's Alternative Investment Services in Asia looks at the factors defining a 'new normal' for the Asian hedge fund industry in 2012.
"We have been watching the continued growth and success, particularly amongst mid-sized Asian hedge funds, throughout 2011 with interest. The defining characteristic of these funds has been an intense focus on good governance, especially around counterparty risk. Fears around a global financial crisis have been so deep-seated that hedge fund managers have had to find a way to satisfy the risk management requirements of investors originally raised after the 2008 financial crisis, leading to a 'new norm' in the institutionalisation of the hedge fund industry in Asia."
Prime Custody Takes Off
"Prime custody has become the hot product of 2011, especially since the second quarter of this year when concerns around the global economy resurfaced. Specifically, Asian hedge funds have bought into using multi primes and segregated custody accounts for unencumbered assets. Prime Custody certainly kept us busy during 2011, and I expect that to continue well into 2012. Funds making the decision to utilise this type of protection are viewed as having institutional quality infrastructure.
"More sophisticated prime custody services are also helping hedge funds improve execution and collateral management, reducing financing costs and enabling efficient reporting in one place. There are also benefits to be had in utilising these assets in securities lending programmes.
"Going into 2012, economic uncertainty is not the only reason hedge funds are spending more time and money on good governance and to protect against counterparty risk. New regulations in many jurisdictions around the world and the bankruptcy of MF Global are continuing to sharpen the focus on the non-investment aspects of how a fund is managed. Industry participants are looking to see if they can do things better and this is something that will ultimately drive the hedge fund industry and the markets."
Health of the Asian Hedge Fund Industry
"Despite a tough fund raising environment everywhere in 2011, Asia experienced a solid year. The average size of a fund launch in Asia in 2011 was the same as Europe, for the first time, at around US$40 million.
"Mid-sized funds did very well in Asia although we should note that these figures are flattered by the success of a small number of new, larger hedge funds in the region. Overall the number of funds in the medium to large category is definitely growing.
"Across all Asian hedge funds, most fund launches raised less than initial targets or were delayed. We also saw the continuation of the closure of small funds but we believe this remains a positive sign of vibrancy of the Asian hedge fund industry.
"Redemptions were not as bad as people feared and some allocations to Asian managers which had been delayed started to come through towards the end of the year. There is certainly less leverage in the system today compared to 2008, so less of a need for investors to realise cash.
"In 2012 we believe that the fund raising environment will continue to be difficult even though indications are that allocations to emerging markets are holding up. In Asia, the threat of the continued withdrawal of big European banks will create opportunities but if these assets start to be sold in falling markets there could be a knock-on effect in Asia that would pose a danger to the growth we've been seeing in the Asian hedge fund industry.
"In Singapore, plans to introduce new regulations for hedge funds in early 2012, which would put them on a par with major global financial centres, include engaging independent administrators. These confidence factors are another step in the direction of the new normal for hedge funds in Asia that embrace good governance and should aid in the release of money from institutions thus creating a stronger industry."
BNY Mellon Alternative Investment Services — a leading service provider for alternative assets, including single manager hedge funds, funds of hedge funds, and private equity — has more than $500 billion of assets under administration and an extensive global presence, including locations in Bermuda, the Cayman Islands, Guernsey, Hong Kong, Ireland, Japan, Luxembourg, Poland, Singapore and the United Kingdom, as well as U.S. offices in five states. In addition to alternative asset administration, BNY Mellon offers a wide range of cash management, foreign exchange, collateral management, trust, operational outsourcing and custody services to the alternative investment industry.
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