Hedge Funds

Financial Risk Management to up Asia investment

HONG KONG (Reuters) - Financial Risk Management (FRM), a $15 billion (7.6 billion pound) fund of hedge funds manager, expects to increase the percentage of its assets invested in Asia as part of its recent expansion in the crowded but high-growth market.

The London-based firm is also looking to double the size of its recently opened five-person office in Hong Kong within 18 months because of the growing number of investment opportunities in Asia, said Paul Dunning, chief executive of its FRM Ltd (London) division.

“Finding a really good hedge fund for the first time ... is a kind of eureka moment. There’s a real conviction and passion that comes with finding a great manager. And it didn’t happen very often here. Now it’s happening more often,” he told Reuters in an interview.

The firm already has established roots in the region, having opened its Tokyo office in 2000 and Sydney office in 2001. Japan's fifth-largest bank, Sumitomo Trust & Banking Co Ltd 8403.T, took a 2.5 percent stake in 2005.

FRM, which was founded in 1991 as a hedge fund research firm, sources roughly 40 percent of its assets from Asia, with most of that coming from Japanese institutional investors like pension funds.

Funds of hedge funds are a popular investment choice with many pension funds because of their stated goal to deliver steady returns in both rising and falling markets. Many pension managers are attracted by the prospect of an asset class in which returns aren’t correlated to more traditional stocks and bonds.

However, unlike traditional equity and bond fund managers, most funds of hedge funds charge both management and performance fees, on top of similar fees charged by the underlying hedge funds themselves.


FRM, which has about 300 pension fund clients worldwide, announced in May it would open offices in Hong Kong this month and Seoul later this year.

In Hong Kong it will compete with home-grown fund of hedge fund firms including SAIL Advisors, Vision Investment Management and KGR Capital, as well the alternative investment arm of HSBC HSBA.L.

Dunning said Hong Kong was selected partly because of proximity to mainland China’s massive pool of savings, which includes more than $1.75 trillion in foreign exchange reserves and some 19 trillion yuan in household savings.

“China will develop its attitude towards hedge funds and funds of funds in particular. There are big pools of capital there and some of those will get diverted towards fund of funds in the coming years,” he said.

The new Hong Kong office includes both client service and research staff to study the Asian hedge fund industry.

Asia-Pacific focused hedge funds had about $156 billion in assets at the end of February, according to Singapore-based Eurekahedge. Globally, the industry had assets of about US$1.75 trillion at the end of March, according to hedge fund tracker Lipper TASS, a Thomson Reuters company.

In the past, some industry watchers have complained that too many Asian hedge funds were small shops that lacked the infrastructure to accommodate large investments, including risk controls.

But Dunning, the former chief operating officer of Goldman Sachs GS.N Asset Management International, said the industry had clearly matured in just the last two years, with bigger players capable of attracting cash from major investors.

The region’s markets are also gaining in depth and liquidity, boosted by high economic growth rates. Dunning said as a result, he expects to increase investment in Asia-focused hedge funds in coming years from the 7 to 10 percent of assets it has now.

“We didn’t actually come across regular really high quality capacity in Asian hedge funds until a year or two ago, the sort of institutional style, risk management that you need,” he said.

“We need to be on the ground when that starts to happen more regularly.”