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.