Penjing’s Wu to Expand Seeding of New Hedge Funds

Date: Thursday, July 9, 2009
Author: Bei Hu, Bloomberg.com

Ronnie Wu, chief investment officer of the $400 million hedge fund of funds house Penjing Asset Management Ltd., will start a pool of money dedicated to providing early investments to new hedge funds next month.

It aims to make five to six investments with the flagship Penjing Asia Fund by year-end, he said in an interview yesterday. The new pool will begin with about $25 million from Wu’s family and friends and then raise capital from investors after the initial money has been deployed.

Wu is seeking to profit from the spurt of start-ups emerging from a financial crisis that’s caused $1.5 trillion in losses and writedowns at financial firms globally and seen more than 300,000 jobs lost, according to data compiled by Bloomberg.

“When I first managed Asian funds of funds back in 2002, we saw a lot of talent but very little capital after the 2000 technology bubble,” said Wu. “The current environment is worse than 2002. You have a lot of experienced talent whose alternative to starting on their own is to sit at home.”

About 150 new funds were set up globally in the first quarter, the highest since the second quarter of 2008, according to Chicago-based Hedge Fund Research Inc. Managers are finding it harder to raise money as investors pulled more than $103 billion from the global industry in the three months to March, reducing total assets managed to $1.33 trillion.

Some managers have left investment banks cutting down on proprietary trading, while others are striking out on their own after the worst hedge fund industry performance on record made some firms unable to charge performance fees, prompting job cuts.

Start-ups

Nick Taylor, ex-head of Citadel Investment Group LLC’s principal investments business in Asia and Europe, Shafiq Karmali, a former Goldman Sachs Group Inc. trader, and Edwin Wong, previously a Lehman Brothers Holdings Inc. managing director, are among those starting new hedge funds in Asia.

“This is turning out to be the year of start-ups as we see an increasing supply of successful and quality managers who are leaving the prop desks of big banks and global hedge funds to start their own shop,” said Christophe Lee, chairman of the Hong Kong and China national group of London-based Alternative Investment Management Association.

Eight out of the 53 existing investments of Penjing’s funds of funds involve a seeding arrangement, in which it receives a share of either the underlying manager’s or the fund’s revenue for being an early investor, said Wu.

Fewer Restrictions

Penjing most recently seeded a fund three months ago and will invest in another next month, he added.

The new pool will have fewer seeding restrictions than Penjing’s existing funds of funds, which cap any single holdings at 5 percent of their investments to diversify risks.

“If we like a certain manager and think we can benefit from their growth by seeding them, the flagship fund is not an ideal vehicle because of its diversified nature and stringent liquidity requirements,” said Wu. “If we create a dedicated seeding vehicle, then the participation is much higher, together with a high risk profile.”

Wu is looking for candidates that meet at least one of the following criteria: strong performance, unique investment strategy, or the potential to rapidly expand assets, he said.

While his seeding activity will focus on startups, it may also include new offerings from managers that have been in operation for a while.

Penjing’s seeding investments so far range from $5 million to $15 million each. Future investments could amount to as much as $25 million after the new pool is set up, Wu said.

Capital Inflows

The company has attracted new capital from investors since May, Wu said. The inflows, the first Penjing has seen since Lehman’s collapse in September, came mostly from private banks representing wealthy individuals, he added.

Yet Penjing is still experiencing some investor withdrawals, leaving its assets under management largely flat, said Wu.

Penjing Asia Fund, set up in April 2005, returned 9.8 percent this year through May, according to a newsletter to investors. The Eurekahedge Asia-Pacific Multistrategy Fund of Funds Index, tracking 54 members, gained 3.8 percent in the same period.

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