SINGAPORE (Reuters) - Asia-based hedge funds will see a turnaround in inflows in the third quarter as investor confidence returns, but new players may still struggle on concerns over risk controls in the scandal-hit industry.
Like their counterparts in Europe and North America, Asian hedge funds have suffered heavy redemptions since Lehman Brother’s collapse in September and the Madoff fraud spooked investors and spurred a retreat to safer assets.
But the pace of withdrawals is slowing, and several industry players predict Asian hedge funds could see net inflows during the second half of 2009, judging by expressions of interest by potential investors and requests for research and due diligence.
“Appetite for risk will progressively resume, with new fresh money flows poured to emerging countries as investors’ confidence is restored,” said Aureliano Gentilini, global head of hedge fund research at Lipper, a unit of Thomson Reuters.
He said inflows to Asian funds will be helped by new asset allocation models adopted by Calpers and other U.S. pension funds that will shift more money to alternative investments.
Asian hedge funds could see a faster turnaround in inflows than their U.S. and European counterparts, boosted by expectations that the region will recover more quickly, a positive outlook for commodity prices and investors’ preference for the simpler equity long/short trading strategies more popular in Asia.
“We are very positive on the outlook for new inflows into our funds since our strategy is performing well and the outlook for systematic fundamental equities long/short like ours is excellent at the moment,” said Frank Holle, co-founder of the Singapore-based Quant Asset Management, a fund manager that uses computer models to invest.
Asian hedge funds saw net outflows of $3.2 billion (1.95 billion pounds) in April following withdrawals of $18.3 billion in the first quarter and $24.4 billion in the last three months of 2008, according to fund tracker Eurekahedge.
The outflows resulted in around 180 fund closures among Asian-themed funds last year compared with about 100 entrants. An estimated 30 Asian funds have been launched so far this year compared with about 40 exits.
The pace of the stock market rally since early March favoured flows into exchange-traded funds or ETFs, which are designed to deploy cash immediately, rather than into hedge funds, said Samir Arora of Singapore-based Helios, a hedge fund that invests in India.
Asia-Pacific stocks excluding Japan are up more than 50 percent from their March lows.
Ankur Samtaney, senior analyst at Eurekahedge, said he expects Asian hedge funds to see net inflows from the third quarter, following three months of gains that have seen funds return an average 13 percent this year.
Asia’s largest hedge funds include the Tokyo-based Sparx Group, Hong Kong’s Value Partners and Singapore’s Artradis, which each have billions of dollars in assets under management, according to Alpha Magazine. They are joined by hundreds of smaller firms including some set up by laid-off bankers using their own savings.
But while a turnaround is in sight for older and established Asian players that survived the sharp downturn in the hedge fund industry last year, new entrants will find it tougher to attract money and must incur higher costs to meet the more exacting requirements of would-be investors.
Many hedge funds lost money and put up “gates” to prevent redemptions last year, and potential investors now want newcomers to demonstrate not just a good trading record but also show they have robust risk management and internal controls in place.
Some former star bankers and traders who have struck out on their own take with them experience and strong reputations as money makers, but even that is no guarantee of success.
“You don’t run a portfolio as you run a trading book,” said Nathanael Benzaken, managing director for hedge fund research and selection at Lyxor Asset Management.
“You always have to get the evidence that they are able to run a fund and control a risk.”
These safeguards include appointing separate fund administrators as well as setting up managed accounts to ensure a client’s money is not tied up with those of “weaker” investors who might force hedge fund to sell assets at distressed prices.
Such systems cost money, and it is harder to outsource back-end and other supporting functions in Asia relative to Europe and North America, said Richard Yin, chief investment officer at Hong Kong asset manager First Vanguard.
Lipper’s Gentilini estimates that in a post-Madoff era, new funds may need $250 million in assets under management to generate enough fees to cover the overheads needed.
“The quality of some of the new launches is incredibly high, but raising seed capital has been difficult and the size of most of these new funds will be less than $20 million in the main partner’s personal capital,” said Harvey Twomey, Deutsche Bank’s head of global prime finance sales for the Asia Pacific.
“Allocators can afford to wait a few quarters to assess early performance and operations,” he added.
Additional reporting by Nishant Kumar in Mumbai and Candida Ng and Saeed Azhar in Singapore; Editing by Neil Chatterjee and Lincoln Feast