Asia hedge funds sharpen focus on risk to win over institutions
HONG KONG (Reuters) - As chief risk officer of newly launched Vulpes Investment, Bert Verdicchio is one of a powerful emerging breed of professionals trying to make Asia's fast-growing hedge funds safer for investors.
Verdicchio is empowered to hedge or even exit exposures he feels are contrary to good risk management at Singapore-based Vulpes. He gets no discretionary bonus and his pay is not tied to the fund's size, ensuring his judgment remains independent.
"No matter how smart you are, we get it wrong from time to time. So there has to be a check," said Vulpes founder and hedge fund industry veteran Stephen Diggle.
More Asian hedge funds are hiring executives like Verdicchio to police rapid-fire computer trades and nimble bets made by portfolio managers, with the goal of enticing some of the billions of dollars that institutions are looking to invest.
Pension funds, insurance firms and other institutional investors are seeking ever larger exposure to Asia's growth.
Alternative assets research firm Preqin, in a survey late last year of 100 leading global institutional investors, found that nearly two-thirds of them thought Asia would present the best opportunities in 2011.
Preqin also estimates that more than 60 percent of the roughly $2 trillion (1.25 trillion pounds) global hedge fund assets now comes from institutions, up from 44 percent in 2008.
But the global financial crisis has made the investors very wary of risk. Hedge funds are trying to address those concerns by making their risk-management systems more visible, even if they have to sacrifice some performance returns in the process.
"Now with 60 percent of the money into hedge funds coming from institutions, they look at risk from a different angle," said Mark Wightman, head of asset-management strategy for Asia-Pacific at technology firm SunGard. "So managers are having to change their infrastructure to meet the need of investors."
What most hedge funds in the region currently have are risk measurers who tell fund managers what was wrong with a particular trade, but lack the authority to stop them from making a wrong bet. That is changing, with the appointment of independent risk officers.
Vulpes founder Diggle, who once ran about $5 billion in assets for Singapore firm Artradis which closed earlier this year after double-digit losses in its main funds in the prior two years, told investors in a presentation that a key difference between Artradis and Vulpes was the appointment of a chief risk officer for the latter.
Former DKR Soundshore Chief Investment Officer Seth Fischer, who is aiming to gather $1 billion for his multi-strategy hedge fund later this year, has hired Eric Berger as his risk officer.
"What's going on at this moment is not so much that the industry has suddenly discovered risk management -- it's always been there. Because investors need to see it, managers are making it a more visible function," said Peter Douglas, principal of Singapore-based consultancy GFIA Pte.
It's not an easy decision, however, to stop a confident hedge fund manager from chasing some of their high-conviction but potentially risky bets. It can lead to lower returns.
The rigid demands of institutional investors, including appointment of a chief risk officer, drew criticism this month at the GAIM conference, the annual get-together for the European hedge fund industry.
Such demands can distract managers from the task of managing money and may still not pinpoint the real risks while starving genuinely talented managers of capital, the industry warned.
"It's a very difficult thing to do because one of the key reasons people set up hedge funds is that they want the freedom to trade which they may have lacked at their previous mutual funds or investment bank," Diggle of Vulpes said.
"But those constraints are ultimately a good idea for investors and therefore good idea for funds."
(Editing by Muralikumar Anantharaman)