Evolution and Trends in Asia’s Hedge Fund Industry, Mumbai

At the Speaker Event at NSE Auditorium in Mumbai organized by IAIP, Paul Smith CFA, MD APAC Region at CFA Institute, provided good insights into the Hedge Fund Industry in Asia having spent 29 years in the global hedge fund industry. He started with the classic hedge fund structure, industry structure, size, number of players, popular strategies, state prior to and post recent global financial crisis (GFC), performance, launches & liquidations, myths, issues & challenges and so on. The event was very well received by both the members and candidates.

Some of the key takeaways are reproduced below:

There are around 1,000 funds in the region managed mainly from Hong Kong and Singapore with asset under management (AUM) of $138bn (Dec-2012) down from a peak of $200bn in 2007-08. Only 40% of them have AUM of $25mn or above. There are only 30 firms with AUM above $1bn; of which 18 firms are the desk/extensions of the foreign firms and only 12 are home grown. They depend on US and European institutional investors, who form more than 80% of their assets. Almost 51% of the funds in the region are long short equity oriented.

The barriers to entry in the industry are low with only $250K required to start a firm. As the proprietary desk at most investment banks in the US and Europe closed down in 2009, professionals launched new products pumping in their own funds.

However, of late the costs of running the firm have gone up as you require a highly qualified team of at least 6 staff right from research and fund management background to risk management, accounting & back-office to be qualified by the due diligence team of the institutional investors or consultants. Add to these costs associated with rents, technology infrastructure etc.

With roughly 1/3rd of the hedge funds still below the high water mark levels achieved at peak, there have been no receipts of fees for the last 5 years. Hence the cash burn has been quick and large resulting into liquidation or closure of funds and firms in the region.

The number liquidation in Asia was pegged at 48, more than double the new launches of only 22, in 2012. The same numbers globally were 211 and 275 respectively. This indicates that the industry has not recovered in Asia.

Apart from costs & profitability the other main reasons for smaller size of the industry or for poor launches are lack of strategies, challenges in scaling & risk of style drift (as prominent long-only small cap strategies have a cap of $400mn), higher volatility in performance etc.

For countries like India the volatility of returns of the hedge funds have been huge: -50% in 2008, +50% in 2009, +12% in 2010, -22% in 2011 (when most mutual funds were positive), +12% in 2012. There is lack of hedging or shorting mechanism with most of these implemented through futures & options. Ideally hedge funds are expected to capture 2/3rd of the upside in the bull market and fall no more than 1/3rd in bear market. Also the interest rate upwards of 8% during the last few years sets a huge hurdle rate for the managers.

The average life of the hedge funds has decreased from 5 years before the GFC to between 3 to 4 years currently. So should one consider career in hedge funds? Yes but only those who have strong stomach to digest risk of unemployment and have more than 10 years view of staying in the industry as the pay-offs are not likely to come before that! As for those who are already there or have already decided to join – network furiously and manage career aggressively!

Contributed by: Chetan Shah CFA

Presentation available on CFA Institute’s India Page: http://www.cfasociety.org/india/Pages/ContinuingEducation-Presentations.aspx

About IAIP

India Association of Investment Professionals (IAIP), which is established April 2005 and located in Mumbai, is an association of local investment professionals. As one of the 136 CFA Institute member societies, IAIP connects members to a global network of investment professionals. Consisting of portfolio managers, security analysts, investment advisors, and other financial professionals, IAIP promotes ethical and professional standards within the investment industry, facilitates the exchange of information and opinions among people within the local investment community and beyond, and works to further the public’s understanding of the CFA designation and investment industry.
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