Doric Capital sees Asia hedge fund growth slowing

Michael Nock, managing director of Doric Capital Corporation, smiles during the Reuters Global Hedge Funds and Private Equity Summit in Hong Kong April 10, 2007.

HONG KONG (Reuters) - The exceptional growth rate of Asian hedge funds will slow in coming years and a shake-up is likely to hit the industry, the head of hedge fund manager Doric Capital Corp. said on Tuesday.

But the booming economies of China and India will provide ample opportunities to the region's best hedge fund managers for years to come, Michael Nock, Doric's managing director, told Reuters Hedge Funds and Private Equity Summit in Hong Kong.

"Any industry that grows at the rate that the hedge fund industry has in the last five years cannot keep growing at that rate without some event that is going to cause a consolidation," he said.

"The rate at which new hedge funds are being set up, one has to question ultimately whether or not over time as more and more people get involved in the industry, if that talent is not diluted at some point."

Nock, who founded Doric in 1999, said "in due course" the costs of investing in back office, risk management and compliances systems would make it increasingly difficult for smaller players to enter the market.

"I was able to survive a couple of (early) years without sort of worrying about paying myself very much. I think in today's environment people may not have quite the same amount of patience," he said.

"I think you'll see a lot of the smaller houses fold up."

EXPLOSIVE GROWTH

Asia's hedge fund industry saw explosive growth last year, powered by double- and even triple-digit stock market gains and an influx of cash into the region's hedge fund managers.

Asian assets under management rose more than 30 percent to $132 billion at the end of 2006, according to hedge fund research firm and consultancy Eurekahedge, and this has since risen to $141 billion managed by more than 1000 funds.

Asia's hedge fund industry remains small by global standards, with some analysts estimating there are worldwide hedge fund assets of around $2 trillion.

Doric is one of Hong Kong's most established hedge fund firms, with more than $390 million under management in two equity long/short total return funds at the end of February.

The firm was ranked as the 22nd-largest Asia-headquartered hedge fund manager in a survey last year by Institutional Investor's Alpha magazine.

While many of the region's hedge funds are embracing increasingly sophisticated trading strategies, Nock said Doric focus is on its core strength of uncovering undervalued stocks across the region.

"We are looking still I think at a five- to 10-year growth that is going to deliver all sorts of interesting opportunities. And I think the key is to keep going back to basics," he said.

"You don't play the game of spreading too many bets all over the place and trying to chase momentum and trying to do fancy things with derivatives ... it's going back and saying 'what are those business that I'm going to be comfortable sitting with'."

An admirer of billionaire investor Warren Buffett, Nock said in the process of looking for these stocks the firm uncovers many of its shorting ideas, often companies in industries facing structural problems.

The firm's flagship $277 million Doric Focus Fund typically has 30 to 45 long positions and 15 to 20 short positions. It rose 3.3 percent in the first two months of 2006, and gained 13 percent last year, 8.7 percent in 2005, 10.6 percent in 2004, 32.2 percent in 2003 and 27.3 percent in 2002.

The firm's $114 million Doric Asia Pacific Small Cap Fund rose 3.6 percent in the first two months of 2007, and rose 12.3 percent last year, 13.7 percent in 2005 and 7.4 percent in 2004.