Asia's Flourishing Hedge-Fund Industry
The article below is from our BRIEFINGS newsletter of 11 November 2019
Asian hedge funds are one of the bright spots in the hedge fund industry, fueled by strong inflows, robust performance and China’s moves to open up its financial markets. We caught up with Goldman Sachs’ Padideh Raphael, whose team recently hosted almost 500 investors, managers and other market practitioners at the firm’s 20th annual Asia Hedge Fund Symposium in Tokyo.
Hedge funds – private investment partnerships designed for wealthy individuals and institutional investors – are relatively new to Asia. How has the industry evolved?
Padideh Raphael: Just two decades ago, Asia hedge fund managers collectively controlled about $10 billion of assets. Today, total assets under management (AUM) have jumped to a record $330 billion, with roughly 80% of that growth recorded in the past five years, according to HFM AsiaHedge. And when you consider the rapidly expanding Asia allocation of global funds, the total AUM almost doubles.
We have also seen an evolution in hedge fund strategies. Two decades ago, Asia-based strategy composition was fairly simple; most funds were long-bias, equity long/short and focused mostly on Japan. Pan-Asia funds, which invest opportunistically across Asia, were still considered an emerging strategy.
Today, Asia managers cover the entire spectrum of strategies, asset classes and investment philosophies, with a geographical reach that spans the breadth of this vast region. There are also a number of Asia managers who are successfully investing globally.
What's been driving this growth?
PR: A confluence of factors has spurred the growth in Asia hedge funds including China’s moves to open its financial markets to foreign capital, corporate governance reforms in Japan, and the increasing sophistication of talent and investment tools in the region. As managers have built their track records and as investment strategies have matured, this has drawn significant attention and capital to the region.
What’s more, Asian hedge funds are living up to investor expectations. Despite slightly lower returns year-to-date, the overall compounded outperformance of hedge-funds returns in Asia versus index performance over the past five years stands at 32%, which is higher than both the US and Europe, according to our analysis.
Which market is attracting the most interest?
PR: Without a doubt, it's China. China-dedicated strategies have been the fastest-growing segment over the past five years, and now comprise the largest proportion of regional AUM at 20%. To a certain extent, this is a natural response to moves by global index providers to increase the weighting of mainland Chinese stocks in their indices, which should trigger sizable passive flows of capital into the local equity markets. Even Japan – whose corporate governance reforms have been an investment theme in their own right – has a China angle. For example, there are now managers looking at Japanese equities as a way to monetize the growth of Chinese outbound tourism.
The flipside of this coin is that performance can be sensitive to geopolitical trends. Persistent trade tensions between the US and China largely explain the weaker performance of Asia hedge funds’ year-on-year returns.
Given these risks, what is the outlook for Asian hedge funds?
PR: Despite the current challenges, we're optimistic that the hedge fund industry will continue to expand in Asia. For starters, we are seeing vibrant industry dynamics in our own pipeline. In addition, new fund launches are up by twice the average over the past decade, and we've seen a strong increase in new prime brokerage mandates overall, from both new clients as well as product extensions from our long-term clients.
The strategic engagement of global clients is also showing signs of acceleration as well. Firms with a long-term presence in the region, whether in Hong Kong, Singapore or Tokyo, are expanding their local footprints, adding to research and risk-taking capabilities. Indeed, one of the key constraints to growth appears to be a bottleneck in talent sourcing, rather than any cooling off in interest in the region.
If we look historically, our proprietary data show that of the 129 hedge fund start-ups in Asia that Goldman Sachs has partnered with since 2009, roughly two-thirds are still operating, a clear testimony to the quality of the opportunities in the region and the level of sophistication the industry has attained. Not surprisingly, funds that began life ahead of a market correction have typically had a lower survival rate. For example, only 27% of the Asia Pacific funds that started in 2010 are still operating today due to challenging market conditions that followed. However, large launches have proved to be more resilient, with $50 million emerging as a possible level of critical mass where a fund’s chances of surviving dramatically increase.