New hedge fund managers tend to face many challenges while establishing their firms. Rapidly changing regulations in the hedge fund industry often leads to increased pressure for new fund managers when setting up their firms. Also, in a highly competitive environment and with lack of extensive track records, fundraising is a challenge. For example, a major institutional investor in Asia-Pacific, Korea Post Savings, recently released a RFP (request for proposal) to hedge fund managers. One of the requirements included a minimum of three years of firm track record, and so new managers were prevented from joining the application process.
Data from Preqin’s Hedge Fund Analyst shows that there have been 242 Asia-Pacific-based hedge fund managers established since 2009. The highest yearly figure was recorded immediately after the global financial crisis in 2009, when 60 new fund management companies were launched. However, the number of new fund managers established since then has been steadily dipping each year, with only 41 new fund managers established in 2013. At the end of Q1 2014, 216 of these 242 firms remained active. A quick look at the breakdown of the fund managers still in operation shows that 36% of these managers are based in Hong Kong, 25% in Singapore and 17% in Australia.
Generating consistent positive returns is always a challenge for new managers and it is extremely vital for these managers to position themselves well among their more experienced peers in this highly competitive environment. For the three month period ending April 2014, funds managed by start-up managers in Asia-Pacific performed well compared to all Asia-Pacific-based funds, bringing in returns of 1.69% compared to 1.07%.
Although there are obvious risks when investing in first time funds, some Asia-Pacific-based investors are becoming less conservative when looking for new opportunities. Data from Preqin’s Hedge Fund Investor Profiles shows that 58% of active hedge fund investors in Asia-Pacific will consider investing with emerging managers, 54% will consider investing in spin-off teams, and 42% will consider seeding funds. Of those investors that will invest in first-time funds, 34% are fund of hedge funds managers, 11% are asset managers and 7% are superannuation schemes. The most prominent regional locations of these investors are Australia (representing 27% of investors), Japan (24%) and Hong Kong (18%). With 81% of these investors stating Asia-Pacific as a specific regional preference for investing, there should be plenty of opportunities for emerging managers in the region to secure capital from this investor base.
Going forward, these institutional investors are likely to continue seeking opportunities in first-time funds. Recently, Singapore’s state-owned investment company, Temasek Holdings invested in a joint venture capital project with Dymon Asia Capital to provide capital to new hedge fund managers. This shows that despite the challenges faced by being an emerging hedge fund manager, it is evident that there are growing opportunities for new hedge fund managers in the Asia-Pacific region.