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Are hedge funds the new mutual funds?

Date: Thursday, November 25, 2010
Author: Aradhna Dayal, Hedge Fund Intelligence

And how Asian managers are reinventing themselves as "classic hedge funds" to avoid this trap

Like it or not, hedge fund managers today have to show all the trappings of a savvy corporate executive if they want to attract blue-blooded investors. It is no longer OK to walk into office in a track suit, hide behind a trading terminal all day, and head out surfing when the markets close. Attending several of the cap intro events in Asia this season, it was obvious that managers today need to be polished, articulate (about their strategy), networked and operationally sound, so their shops look and feel ‘institutionalised’ enough to be able to ‘invoke confidence’ in potential investors.

What was also very interesting was the constitution of investors: for the first time this year I saw a big wave of pensions, endowments and sovereign wealth funds from the US, Middle East and Asia come in and make a concerted effort to understand the Asian managers (several of them also attended the recent AsiaHedge Awards dinner in Hong Kong). While this is good news for funds here, what this also means is that this wave of institutionalised money will seek similarly institutionalised, low risk-medium returns ‘boxed-in’ strategies at large hedge fund shops, with a fairly long list of dos and don’ts for the portfolio managers. In other words, it is to some extent the death of maverick, contrarian (and often niche) hedge fund managers the world over.

Does this mean that the hedge fund industry is turning into the mutual fund industry of 15 years ago?

A similar story happened with mutual funds in the mid-nineties, when all the large institutional capital ‘finally discovered’ mutual funds and piled into them to create the Fidelitys and Templetons of this world. And there is a real danger that the hedge fund industry globally (including Asia) may go that way.

However, following several heart-to-heart conversations with some of the smartest Asian hedge fund managers, I see a real desire to break free from this ‘corporatisation’. Instead, a small but influential set of Asian managers are looking to actively reinvent themselves as ‘classic hedge funds’ who are not afraid to make directional bets, invest in niche asset classes and generate alpha out of pure investing brilliance and ‘out of box’ thinking.

These third-generation managers will be those that would want to be money managers for themselves and for some ‘close partners’, often taking in money only from a select few ‘like-minded’ investors with closely aligned interests and the freedom to follow their investment convictions. In other words, a re-emergence of yesteryears’ cult hedge fund managers such as George Soros or Ken Griffin or Jim Leitner.

Asian managers doing this are also being helped in no small measures by the rapidly evolving Asian capital markets. Deepening liquidity, growth of listed derivatives, the emergence of renminbi bonds and a prolific M&A scene is ensuring that hedge fund managers in Asia have a diversified and deep pool of ultra-new investible asset classes that allows them to create alpha for their clients in the most innovative ‘hedgie’ ways, and in turn saves them from turning into large beta-oriented ‘mutual fund’ shops.

In line with this, we profile in the AsiaHedge November-December issue, Gartmore Japan and CAI – two true believers in the classic hedge fund model.

The latest winners of the AsiaHedge annual awards confirmed this trend, too. Most winners were long-standing, genuine hedge fund managers that have delivered alpha through the fickle markets and evolving asset classes of the Asian growth story.

The AsiaHedge Awards dinner, in its ninth year now and attended by top managers and (for the first time) by some of the most influential investors from across the world, has emerged as the ultimate showcase for the classic Asian hedge fund managers, and we bring you a full report on the event and winners.

We are also delighted to announce the theme and dates for our flagship event, the AsiaHedge Forum 2011. The theme this year is Meet Tomorrow Today, signalling the arrival of Asia as tomorrow’s global economic and investment hub.

The event, debating some of the most pressing issues in the Asian and global hedge fund world today and strategies to harness the Asian growth, will be held on 16-17 March at the JW Marriott Hotel in Hong Kong.

We look forward to seeing you there.