Anticipate that the new crop will be more diverse in its range of investment strategies; More esoteric credit and macro-oriented strategies as well as multi-strategy funds expected; Emerging funds are turning to the ultra-high net worth, family offices and friends
HONG KONG, 6 February 2013 — The year ahead will likely remain sharply challenging for Asian hedge fund managers looking to raise new investor capital. But the “stars” of recent years that have lodged standout gains will continue to see moderate inflows from their traditional investors – US institutions – while new entrants are turning to ultra-high net worth investors, family offices and their own friends amid a dearth of institutional seed capital. Aidan Houlihan, Managing Director for BNY Mellon’s Alternative Investment Services in Asia discusses the outlook for 2013.
Continued Evolution of Asia’s Hedge Funds Market
“From my vantage point here in Hong Kong, I believe the gathering trend for 2013 is the continued gradual evolution of Asia’s hedge fund community. Although we expect fewer fund launches over the next 12 months, we do anticipate that the new crop will be more diverse in its range of investment strategies. This will support Asia’s gradual shifting away from a monolithic emphasis on equity long-short strategies. Already, more esoteric credit and macro-oriented strategies as well as multi-strategy funds have entered the market. Today, equity long-short funds account for roughly 75% of hedge fund assets under management, down from 90% just a few years ago.
“We believe the hedge fund industry in Asia will continue to grow and evolve and provide investors with more options. Whilst it is certainly true that we expect to see fewer launches in 2013, we believe the quality of the funds coming to market and level of assets under management they will raise on launch date will continue to increase.
“In my opinion, one of the main headwinds for the average hedge fund in Asia in the year ahead will continue to be raising capital. The new capital coming into Asia will largely be limited to outliers that have significantly outperformed both peers and the broader market. These fund managers have consistently been rewarded with capital inflows, and investor interest in them remains high.
“Seeding arrangements for early stage hedge funds in Asia have become harder to secure. The spate of high profile launches in the first half of 2012 ultimately proved short-lived. Many, however, have found success tapping less conventional capital raising channels such as family offices, ultra-high net worth individuals and personal friends. Smaller funds have also adapted by becoming creative in their investor targeting. And renewed interest in hedge funds in general should trickle down to the start-up space, both globally and in Asia.
“A particular challenge for funds in Asia is their heavy reliance on investors from the United States, which shows few signs of changing in the year ahead. There are few regional sources of hedge fund investor capital in Asia as there remains an institutional bias toward investments considered more tangible, such as real estate or private equity. BNY Mellon estimates that 80 cents of every dollar currently being raised for Asian products comes from US investors. Europeans make up most of the remainder, leaving very little from regional sources.
“I believe Asian hedge funds need to try and cultivate a deeper base of investors in their home markets. The majority are overly reliant on foreign capital, which is a trend we expect to continue into 2013.
“The formula for diversifying their shareholder base may be quite simple: better performance. The challenge for the hedge fund industry overall will be maintaining – and in some cases re-establishing – its reputation as an asset class that can outperform the broader market and provide uncorrelated returns. The last couple of years have challenged that reputation. But if hedge funds regain their footing this year, we expect fundraising to improve apace, and Asian fund managers should definitely participate in that trend.”
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.
BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, BNY Mellon delivers informed investment management and investment services in 36 countries and more than 100 markets. As of December 31, 2012, BNY Mellon had $26.7 trillion in assets under custody and administration, and $1.4 trillion in assets under management. Whether clients are looking to create trade, hold, manage, service, distribute or restructure investments, BNY Mellon can act as a single point of contact for their investment needs. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Additional information is available on www.bnymellon.com, or follow us on Twitter @BNYMellon.