Future Opportunities and Challenges in the Australian Hedge Fund Industry - October 2013

by Ivan Jincheng Han

  • 25 Oct 2013
  • HF

Australia is one of the largest hedge fund centers in the Asia-Pacific region, behind only Hong Kong and Singapore. According to Preqin’s Hedge Fund Analyst, nearly 18% of all Asia-Pacific hedge fund managers are based in the country, managing over 22% of the assets within the region. The prominence of Australia’s hedge fund industry can be attributed to several factors, such as Australia’s flourishing superannuation industry and a mature financial industry.

Pension plans and superannuation funds have become the leading allocators to hedge funds around the world, and Australia’s superannuation industry is one of the most mature and largest within Asia-Pacific. In fact, Preqin’s Hedge Fund Investor Profiles shows that Australian superannuation funds are the single largest group of investors from the Asia-Pacific region, making up nearly 16% of the regional total. The industry had grown rapidly in recent years, and this growth is likely to accelerate as compulsory contribution of all employee salaries in Australia is set to increase from 9.25% to 12% by July 2019. This serves to attract hedge funds to set up shop in order to gain greater access to this source of institutional capital. The fund raising outlook for hedge fund managers in the region could also be positive; falling interest rates in Australia have driven investors to look for alternative avenues for investments.

However, many fund managers who have recently set up new funds in order to capitalize on this opportunity to fundraise can face significant hurdles in their efforts. Investors in the country have concerns about investing in hedge funds following the high-profile collapse of Basis Capital, and only managers with a significant track record will be able to find investors willing to allocate to their funds.

Australian hedge fund managers are also not the only ones eyeing the capital in the country. Australian investors could be a significant source of funding for fund managers globally. Eighty percent of Australia based investors will look at hedge funds globally; and those managers in the established US and UK markets are of particular interest to these investors.

Despite the challenges, Australian hedge funds should continue to remain attractive to investors. Preqin’s Hedge Fund Analyst shows that returns from hedge funds managed by Australian based managers had largely remained competitive with their global peers, and had outperformed them since 2011 on a YTD basis. As of September 2013, funds managed by Australian managers returned 12.82% YTD, as compared the 7.33% returned by global hedge fund managers.

Looking forward, investment opportunities for Australian based hedge funds continue to abound. For example, European banks had been pulling out of the region in recent years to either focus on their key business regions or to gather capital to meet regulatory requirements. This included major French banks Societe Generale and Credit Agricole, and more recently Britian’s Lloyd’s Banking Group. This has led to a general financing gap in the country that is primed for hedge funds to step into. From a regulatory point of view, the Australian Securities and Investments Commission is also actively working to increase transparency to the industry, recently launching new guidelines for hedge fund disclosure in September 2013. This will only serve to enhance confidence in the industry by both institutional and a growing retail investor market.

With the combination of a rapidly growing investor base and attractive investment opportunities, Australia is poised to remain a key player in the hedge fund industry in the region moving into 2014 and beyond.

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