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The hedge fund industry in much of the world managed a solid recovery from the global financial crisis, with assets under management rising, but in Asia growth has stalled.
The difference is stark. In North America, hedge fund assets at the end of 2007, as the financial crisis was beginning, were about $1.19 trillion and after declining during the crisis, had risen to about $1.49 trillion by the end of August this year, according to data from Eurekahedge.
In Europe, the recovery was less dramatic, with assets rising from $464.3 billion at the end of 2007 to about $517 billion at the end of August, the data show.
But in Asia, including Japan, assets fell from $176 billion at 2007's end to $168.9 billion by the end of August - that's including $2.3 billion worth of performance-based growth and $5.3 billion worth of inflows, the data show. Asia contributes less than 8 percent to the global pool of assets under management.
Hedge fund managers see several reasons the region's hedge fund growth is lagging.
"The comparison between building a hedge fund in Asia and elsewhere is absolutely there's no difference," noted Nick Taylor, founder and chief investment officer at Hong Kong-based Senrigan Capital, at the Milken Institute's Asia Summit last month. "It's the ingredients you have to do it in the place you're doing it. In the U.S., there's an enormously deep bench of talent … That's less true in Europe and it's even less true in Asia." Senrigan declined to provide its assets under management.
Taylor is not the only one who sees difficulty in building a hedge-fund team in the region.
"Those with true hedge fund management experience, as in those that are strategic, you can number them on your hands. There are virtually none. And certainly none that are available," added Adam Levinson, chief executive at Singapore-based Graticule Asset Management Asia, which has around $4 billion in assets.
Another factor hindering Asian hedge fund growth is that it's just too far away from the big money, managers said.
"When you look at the vast pools of institutional capital, North America is dominant," Levinson said at the conference, noting that large portions of the money many hedge funds manage comes from U.S. pensions, endowments and state funds. "Proximity matters and it makes it more difficult to raise money from those institutions."
A home-grown problem also dogs industry growth in Asia: Competition from the region's sovereign wealth funds.
"There is some amount of crowding out, because they manage in-house, which is why the bulk of us have our investors largely from the U.S.," Danny Yong, chief investment officer at Dymon Asia Capital, which has around $4.5 billion in assets, said at the conference. Asia is home to some of the world's biggest wealth funds, including Singapore's GIC and Malaysia's Khazanah Nasional.
Those funds don't just manage their own money rather than investing in hedge funds, and increase competition in a limited fund-management talent pool , they may also chase similar deals and investment strategies as regional hedge funds.
There is also competition from Japan Inc. for hedge funds wishing to buy large stakes in companies. Japanese corporates are seemingly on the hunt for deals, with returns at home appearing set to remain low as the country's efforts to break out of decades of deflation stumble. That means the bar for deal returns may be low for Japan's companies.
For example, Japan Tobacco bought the Natural American Spirit brand from Reynold's American for $5 billion last month; the deal sent the Japanese company's shares sharply lower, with analysts saying it may have overpaid. That's similar to Japan Post's $5.1 billion acquisition of Toll Holdings in February, which was priced at a 50 percent premium to the Australian company's share price before the offer.
Indeed, part of the reason hedge fund assets in Asia have declined is due to the industry contracting in Japan. The country's hedge funds had around $16.9 billion in assets at the end of August, down from $23.6 billion at the end of 2007, Eurekahedge data show.
Japan's hedge funds lost momentum from 2007-2009 as their below-average performance, especially compared with Asia ex-Japan funds, spurred around $18.7 billion in withdrawals, Mohammad Hassan, an analyst at Eurekahedge, said via email. But he noted that fund flows had flowed back into Japan long-only funds since 2012 in a "one-way bet on Abenomics," or Prime Minister Shinzo Abe's plan to kickstart Japan's long-moribund economy.
To be sure, some of Asia's hedge fund stagnation could be because lower-quality funds have been squeezed out.
"When investors first came out to Asia to look for hedge funds, I feel that the requirements, especially on the infrastructure front, weren't as stringent. In some ways, Asia hedge funds were given a hall pass," on factors including operations, compliance and risk management, Yong said. "Today, post-global financial crisis and post-Madoff, investors are no longer that forgiving."
He was referring to Bernie Madoff, who was convicted of running the largest Ponzi scheme in U.S. history after his investment fund, in operation since the mid-1970s and falsely claiming to manage as much as $65 billion in client funds after fictionalizing returns, collapsed under the weight of withdrawal requests during the crisis.