Understanding Asian Investors
Asian investors are coming back to hedge funds after moving out in response to the credit crisis. High-net-worth Asian investors reduced their alternatives investments between 2006 and 2010, as the table below shows. Institutions did the same. Now they look to construct new portfolios.
________________________________________________________\wealth dropped 22.3% to US$7.4 trillion.
Breakdown of Asia-Pacific HNWI Financial Assets, 2006 vs. 2010
* Includes commodities, foreign currency, derivatives, hedge funds, private equity and venture capital
Source: Capgemini/ Merrill Lynch Financial Advisor Survey, various years.
We present insights from two executives who watch the Asian investment market.
One is Stuart Feffer, co-chief executive officer of LaCrosse Global Fund Services, an administrator and middle-office service provider with clients in Asia as well as other parts of the world. The clients include managed futures and global macro funds.
LaCrosse is part of Cargill, the privately-owned commodities giant. Before it was spun out as an independent unit, LaCrosse was the back office of Black River Asset Management, an internal hedge fund that evolved from Cargill's proprietary trading desk. Black River and other Cargill accounts are about one-third of the assets LaCrosse administers; the rest are from outside managers. LaCrosse has an operating center in Singapore in addition to Minneapolis, London and Buenos Aires.
Mr. Feffer joined in 2006 to help with the spinout of LaCrosse. Prior to that he worked at BearingPoint and Capco. Here he provides a global perspective.
Then David Bennett discusses one particular market-Korea. He is director of the hedge funds practice at the institutional sales division of Hana Daetoo Securities in Seoul. In addition to working with local institutions that allocate to hedge funds, he and his team in the past oversaw a fund of funds.
Before joining Hana, Mr. Bennett worked in Singapore for Chinkara Capital, a provider of alternative investment advisory services to Asian institutional and high-net-worth clients. He has lived in Korea and Singapore a total of 14 years.
Stuart Feffer: "Subscriptions and fund formation are happening across the board but started earlier in Asia."
Investors are returning to hedge funds. We're seen net subscriptions across the board beginning in third quarter 2009 and increasing in Q4. So far this year subscription activity has been significant and fund formation has resumed. The new funds are in the main smaller than they used to be, but there are exceptions to that. Some of our clients that have well-established relationships with investors and strong track records were able to launch new vehicles with significant assets at the outset.
It is interesting where the subscriptions are coming from globally. While a big part of the money is from American investors who have always been the largest segment of hedge fund investors, we have seen activity by European and Asian institutions as well. Subscriptions and fund formation are happening across the board but started earlier in Asia. It is an up cycle there.
Most Asian investors are not looking solely for Asian funds, because they seek to diversify their holdings. However, a number of Asian allocators, like fund of funds managers, tend to focus on local strategies because they have expertise in local managers. Because of that, money coming through a local fund of funds tends to stay in Asia. But wealthy individuals and institutions are just as likely to invest around the world.
Asia is an important market for us, because we did not face the same kind of competition as in the US and Europe and we were already there to support Cargill and Black River. We were able to compete on a much more equal footing or better, because we had been there for a long time and others had not. So we've done very well in Asia.
Of the mandates that we are getting this year, more than half are in Asia, where there is a very active fund formation market. The strategies are mainly Asian equities and macro but we even saw our first Asian distressed debt fund. A lot of the money going into Asian funds comes from the West, where investors look for exposure to those markets.
Korea's sovereign wealth fund, Korea Investment Corporation, will increase its allocation to alternatives to 20% of total assets from 10%, according to recent press reports. KIC manages a little over $31 billion but Korea might moves more of its foreign exchange reserves -reportedly $280 billion -to the SWF. Another Korean investor recently provided seed money to a commodity trading advisor.
While there are opportunities, Korea is a difficult country to raise capital. Mr. Bennett reviews this market.
David Bennett "Managers who want to raise money in Korea have to make a serious, long-term commitment."
Korean institutions, initially led by Samsung Life and Samsung ITMC, built up alternatives portfolios-a trend that began in 2004 and accelerated in 2005. But in the 2008 crisis, they pulled out of hedge funds. There was a decision to get rid of all the investments and start over. Now it is an exciting time because we're at the starting-over stage.
Before 2008, Korea had well over $2 billion allocated to hedge funds. The amount now is considerably less than that, probably around half a billion dollars. It will grow, without a doubt. We haven't seen allocations yet but there is a dialogue with institutions, they've started to look again. Last year Korea Post was one of the very few Korean investors that considered hedge funds. The current conversation is broader.
Korean institutions typically followed the usual path of starting with fund of funds and moving to single-manager funds as they gained confidence. A few moved away from fund of funds altogether and allocated only to single managers. There have been several occasions where a commodity trading advisor or CTA fund of funds got an allocation. There is interest now in managed account platforms and UCITS.
One of the biggest obstacles managers face in contacting Korean investors is a special characteristic of the market. There are two legally distinct types of Korean institutional investors. Those deemed qualified professional investors -such as large insurance companies -can invest directly in offshore funds. But others, like many pension plans, have to invest through onshore conduits-funds set up by a Korean asset management company or trust accounts set up by a local securities firm or bank.
Much of the hedge fund investing occurred via these onshore vehicles. Offshore hedge fund investments go through a local custodian bank that is the legal subscriber on behalf of an onshore fund of funds specifically set up for one institution, whose name may not appear on the documents.
Institutional mandates can be anywhere from $1 million to $50 million. If an allocation is more than 10% of an offshore fund's net asset value, that triggers Bank of Korea reporting requirements. So allocations tend to be less than 10% of the offshore fund. Another limit is that no single offshore fund can represent more than 45% of the onshore vehicle's assets unless the offshore fund is registered, which has been a requirement since last year's enactment of the Financial Investment Services and Capital Markets Act.
Private banks distribute hedge fund products through a similar structure. The main difference is that they can take 30 clients, whereas for institutions, it is typically one client, one mandate.
All this makes it difficult for smaller hedge funds to raise money in Korea. It is not impossible, you can do the reporting, but the requirements represent an additional burden.
The structure contains several key decision makers. It used to be the local investment trust management company -the asset manager -who would introduce offshore fund managers to institutions. Now some institutions are more active in choosing offshore funds for themselves and then asking the local ITMC to create the onshore vehicle for the investment. Others will consider managers introduced by the ITMC but want other managers to be put into the portfolio.
We work as an intermediary for certain institutions and offshore funds. For instance, we both advise and have set up a trust account for Korea Post's hedge fund program. Once a Request for Proposal is released, which is in Korean, I notify the managers with whom I'm in touch. But we also work with local asset managers to identify funds that may be pertinent for a particular institution.
It is easier to understand how big institutions like Korean Post, the National Pension Service and the sovereign wealth fund, Korea Investment Corporation, operate. You have to be aware that KIC and NPF are governed by separate laws. But smaller institutions are much more difficult because of the number of intermediaries involved. It is a complicated market for this reason.
Managers who want to raise money in Korea have to make a serious, long-term commitment. US and European hedge funds are interested and are increasingly making marketing trips to the country. I have two or three meetings a week with visiting managers. It is a frustrating market in that there can be long periods of inactivity, but when things happen they happen quickly so it is important to be engaged and to maintain a dialogue with the investors.