Big boys squeeze out boutique hedge funds
Several local names sent packing as size and scale matter more, post-crisis
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Several local names sent packing as size and scale matter more, post-crisis
By LYNN KAN
27 April 2011
The big boys are squeezing smaller players out of the hedge fund industry here, with larger funds getting most of the capital in the market and leaving boutiques in the lurch - sometimes to flounder.
The rumblings in the industry have grown louder over the past year, and some well-known local names have downed the shutters.
‘This is such a competitive business that the top decile managers attract 90 per cent of the assets,’ says Wong Kok Hoi, chairman and CIO of APS Asset Management, with S$1.9 billion in assets. ‘I heard from one investor that 15 per cent of his managers wound up their business last year. That’s a high casualty rate.’
The small to medium-sized funds have been hit as conventional sources of investments from before the global financial crisis have since dried up, says Michael Coleman, managing director of Aisling Analytics with US$1.4 billion under management in its Merchant Commodity Fund.
Pre-crisis, many of the more modestly sized Singaporean hedge funds found their investors in the form of European fund-of-funds and family offices, which were previously willing to stomach the risks.
Now, however, only institutional investors from the US and Europe have been ploughing their dollars into Singapore’s hedge funds - but not to the smaller guys, says Mr Coleman. ‘If you’re a large investor, you would want a large manager. Even though they may like the strategy of a US$20 million firm, it doesn’t have the scale they’re looking for.’
Peter Douglas, the founder of Singapore-based GFIA, a hedge fund research and consultancy, says that because investor interest has been tilting towards Asia, a lot of ‘big global asset-gathering firms’ have been setting up shop here.
Some of these firms in question aren’t hedge funds per se, but they are growing quite healthily.
For instance, assets under management (AUM) for investment management firm JP Morgan Asset Management (Singapore) grew from US$10.43 billion in September 2009 to US$11.43 billion in September 2010.
In November, UK-based fund manager Threadneedle appointed Raymundo Yu, former chairman of Merrill Lynch for Asia-Pacific, to head its Asia-Pacific division. The firm, with over US$100 billion in AUM globally, will be doubling its Singapore headcount from 15 to 30 in 2011.
Boutiques face further challenges in the year ahead.
First is the higher costs associated with running a hedge fund, says Christopher Kundro, co-CEO of hedge fund support service firm Lacrosse Fund Services.
‘Nearly half of hedge funds in Asia manage less than US$25 million which is only about a quarter of the assets required to cover expenses and attract many institutional investors,’ says Mr Kundro.
The US’ Dodd-Frank legislation requiring Asian fund managers with US clientele to register with the Securities and Exchange Commission will also add to costs, says Mr Kundro. ‘Since about 40 per cent of assets in Asian hedge funds come from the US, Asian funds are fundamentally impacted by these new rules.’
After the Madoff scandal in 2010, investors have hesitated to commit to higher risk equities, says Alex Henderson, managing director of Henderson Global Investors, Asia.
‘There has been greater regulatory scrutiny on distribution and sales process of financial products for retail investors,’ he says.
Two of Singapore’s largest hedge funds - Artradis Fund Management and Target Asset Management - folded last year.
Though all of the above may sound like funds are being squeezed and are pulling out of the market, it isn’t the case. The flow of fund launches in the past six months have not abated nor have their launch sizes shrunk, says Mr Douglas.
Furthermore, data from hedge fund industry tracker Eurekahedge shows a pick-up in fund launches.
Comparing January 2010 to February 2011, the number of funds increased from 187 to 210. However, AUM shrank in the same period from US$16.1 billion to US$14.8 billion.
Some expect the number of funds to increase over the year.
Says Mr Kundro: ‘New funds are attracted to Singapore because managers have an increasing preference to manage Asian assets locally.
‘Equally as important, the Monetary Authority of Singapore has developed an excellent balance between facilitating the establishment of new funds while providing investors which the protection they demand.’
Another trend has been the rising launch size of these funds.
Mr Douglas notes that whereas pre-crisis, funds used to start at US$10 million to US$20 million, the range last year was between US$30 million and US$50 million and has climbed to US$100 million currently.
Still, a larger launch size is no indication of performance. ‘We’re broadly seeing start-ups still at their launch size, because investors have not been willing to invest in boutique hedge funds and have been going to big global alternative (asset management) firms,’ says Mr Douglas.
While small and medium-sized firms are, for the moment, neglected orphans, historical experience suggests that change might be coming.
‘Everyone knows that size is your enemy in the hedge fund industry; running a fund bigger than US$500 million runs into headwinds,’ says Mr Douglas. ‘At some point, the pendulum will swing back and appetite will come back to boutiques, but it might take a while longer, like one to three years. Certainly not in a few months.’