No Performance Fees for 80% of Asia Hedge Funds

Date: Thursday, February 12, 2009
Author: Bei Hu, Bloomberg

More than 80 percent of Asian hedge funds won’t be able to charge their investors performance fees after finishing 2008 below their peak net asset values, according to data provider Eurekahedge Pte.

About a third of the 1,000 regional hedge funds tracked by Eurekahedge had positive returns last year, compared with 82 percent in 2007, the data provider said, citing figures from Jan. 30 when about 90 percent of funds had disclosed December returns.

“When you are down 40, 50 percent, it’s hard to get back,” said Richard Johnston, Hong Kong-based Asia head of hedge fund consulting firm Albourne Partners Ltd. “A lot of managers are not going to see performance fees for a couple of years.”

Hedge fund closures are likely to accelerate as shrinking assets and the absence of incentive fees threaten their viability. Assets under management fell below $50 million at more than half the funds followed by Singapore-based Eurekahedge last year, from 39 percent at the end of 2007.

The Eurekahedge Asian Hedge Fund Index retreated 21 percent last year, the first annual loss since records began in 2000, while assets managed by Asian hedge funds shrank 36 percent, according to Chicago-based Hedge Fund Research Inc.

Fund Closures

“A lot of them have been prolonging their existence from last year to plan for a more orderly or gracious closure, or buying time to see if they can attract new money,” said Daniel Jim, managing director of Hong Kong-based Tripod Management Ltd., an investment advisory firm that manages $300 million of mostly hedge fund assets. “They will probably be throwing in the towel by the second half of this year.”

Jim predicts the number of Asian hedge funds will shrink by another 20 percent in 2009.

The number of Asian hedge funds falling below their historical net asset value, known as the high-water mark, climbed to 86 percent from 75 percent at the end of 2007, according to Eurekahedge. Those funds may charge performance fees from new investors, though they can’t charge investors who got in before the peak.

Without earning incentive fees -- typically 20 percent of gains -- most funds will only charge 2 percent of the assets they oversee as management fees. For a $50 million fund, that equates to just $1 million in annual charges.

“When you start to go way under $100 million, it starts to create viability issues,” Johnston said. “Once you go under $50 million, you are going to struggle a bit.”

Shrinking Size

Hong Kong-based APAC Capital Advisors pulled the plug on its Greater China Fund in September after assets declined to about $10 million, from a peak of about $55 million, managing director Ken Lu said in November.

Tozai Investment Advisory Ltd., a Tokyo-based hedge-fund advisory firm, was closing its business after market losses and investor redemptions cut its funds’ assets to zero from a peak of $70 million, senior partner Angus McKinnon said in December.

In all, 153 Asian funds shut last year, a 63 percent increase over 2007, Eurekahedge said. The number of funds reporting returns to its Asian database also dropped by about 10 percent in the year to December, Eurekahedge’s senior analyst Rajeev Baddepudi estimated.

The average size of Asian hedge funds shrank by more than a third to $133 million in 2008, according to Eurekahedge. About 23 percent of Asian funds grew assets last year, compared with 63 percent in 2007, the data provider said.

The number of new Asian hedge fund starts halved to 79 in 2008, as investors tightened their purse strings.

Thirty-seven percent of Asian hedge funds managing $50 million or less reported positive returns last year, the data provider said.

Hedge funds are private pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices, and participate substantially in profits from money invested.

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net