Asia Hedge Funds Embracing Transparency to Win Cash

Date: Friday, November 25, 2011
Author: Nishant Kumar, Reuters.com

Asian hedge funds, starved of capital, are increasingly giving up their treasured secrecy and allowing clients more control of their investments in order to draw money from institutions.

The so-called managed accounts that more Asian hedge funds have started to offer clients come as a lifeline for funds in the region, a majority of whom are otherwise too small to lure institutions who are the biggest investors in the industry.

In managed accounts, the investors authorize hedge fund managers to buy and sell specific securities. Hedge funds may also agree to charge less than the 2 percent management fee and 20 percent performance fee they usually take from clients.

Institutions are embracing the product as they are still scarred by the memories of the 2008 financial crisis and the Madoff scandal as the hedge funds they invested in lost money and also prevented them from withdrawing their cash. They are thus now demanding more transparency and liquidity.

For the hedge funds, managed accounts are a way to keep the funding tap open in a tough capital-raising environment as the global economy lurches into a slowdown.

"As a manager trying to grow a new strategy, you do whatever it takes to get capital," said Gautam Prakash, founder of U.S.-based hedge fund Monsoon Capital. "I see the majority of client money into my Asia fund coming through managed accounts route, going ahead."

Monsoon Capital's Asia hedge fund currently runs one $5 million managed account it started in November and expects to sign at least two more this month that will almost double its assets to $40 million.

Smaller Minimums

About 65 percent of Asian funds have $50 million or less in assets, according to hedge fund tracker Eurekahedge, making it tough for investors to commit substantial capital to them.

Investors typically avoid contributing more than a tenth of a fund's assets. A managed account solves that problem for large institutional investors who feel comfortable investing in smaller managers in exchange for better fee terms and control.

While bigger hedge funds in Asia such as Macquarie Funds Group require a minimum of $100 million to run a managed account, some managers are willing to provide the service for as little as $5 million now depending on their fund strategy. Macquarie, whose smallest managed account runs $200 million, started its third account in 2011, a source with direct knowledge of the matter said. Macquarie could not be reached immediately for a comment.

"People want segregated accounts because they are concerned about counter-party exposures," said Alex Hill, co-founder of Singapore-based hedge fund Tantallon Capital.

Mr. Hill, whose firm manages about $300 million and requires a minimum of $20 million to run a managed account, said they had more money in such accounts than in funds.

BNP Paribas' unit THEAM plans to quadruple its investment in Asia-focused hedge funds to €200 million ($270.6 million) over the next year and about a third of that would be invested through the managed accounts route, said Eric Debonnet, THEAM's head of alternative multi-management. THEAM requires at least $25 million to have a managed account set up.

Max Gottschalk, co-founder of Swiss asset manager Gottex, said he added one Asia manager to his managed accounts platform LUMA this year and was in discussions with five others.

Singapore-based MNJ Capital Management's Chief Executive Joseph Oyaski said he was in talks to take on his first managed account worth $20 million next year.

"Fund managers definitely appear to be prepared to go that extra mile for these decent sized investments and we expect to see more demand through 2012," said Mark Wightman, head of asset management strategy for Asia-Pacific at technology firm SunGard.

In a survey of 50 institutional investors released last month, research firm Preqin said transparency was one area where half the respondents wanted to see further improvements.

In a standard hedge fund product, investors get to know about the fund's strategy, objectives and returns, but won't have access to its holdings, leverage levels and other data. In managed accounts, investors can get daily access to such data. Since a managed account is the property of an investor, positions can be liquidated as soon as any trouble is sensed.

For example, investors could have bailed out of hedge fund Amaranth prior to its collapse in 2006, had they known it was heavily exposed to one highly leveraged strategy: betting that the price of natural gas would rise.

The firm lost more than $6 billion over two weeks in 2006 — the worst loss in the history of the $2 trillion industry.

Not all hedge funds can, however, freely offer managed accounts as they will have different levels of sensitivity to their underlying positions depending on their strategy. For example, while it might be easier for an equities long/short or managed futures fund to offer managed accounts, those operating a relatively illiquid strategy, such as distressed debt, might be more sensitive to their holdings.

Asian hedge funds saw net outflows of $2.2 billion in September and October, erasing nearly a third of the inflows in the previous eight months, data from Eurekahedge showed.

While the global hedge fund industry has regained its pre-crisis asset level, data from industry tracker AsiaHedge shows assets in Asia contracted 5 percent in the first half of 2011 to $145 billion — $47 billion below the peak level hit in December 2007.

Managed accounts are seen as one way to close that gap.

"We see many funds either looking to put in place or add to existing managed accounts," Mr. Wightman said.

By Nishant Kumar