Australia's hedge fund industry has become the largest in Asia despite the nation's most significant investor, the Future Fund, allocating its entire A$14.5 billion alternatives portfolio to offshore managers.
Australia's 63 hedge fund management firms control at least A$42.8 billion (US$44.8 billion) in assets, according to a hedge fund industry report produced by David Chin of Sydney based BasisPoint Consulting.
In addition, there is another $2 billion in long/short strategies run by ‘boutique' managers who have opted not to be classified as a hedge fund in the report but instead are counted amongst the 102 (predominantly) long-only, benchmark unaware Australian managers holding A$165.6 billion in assets.
However, the local industry would be much larger if only they could win more mandates from Australian pension funds and the Future Fund, the nation's de-facto sovereign wealth fund (SWF), notes David Chin.
Australia's A$916 billion institutional pension fund industry allocates around 3.6% of their assets to hedge fund and fund-of-hedge-fund strategies, according to an AIMA/University of NSW study in 2010 on the top 100 superfunds. But of these allocations, just 20% went to local managers, while 78% were awarded to US hedge funds, according to the survey.
'It's a similar story with the Future Fund where its alternatives portfolio, worth 18.8% of the SWF's assets, is allocated entirely to 20 offshore managers, with each manager winning a mandate of A$725 million on average,' notes Chin. ‘The sheer size of these hedge fund allocations means only the larger global managers can be selected.'
Of particular interest to the international hedge fund community is that the Future Fund defines alternatives as ‘skill based absolute return strategies and other risk premia providing diversity of return streams.' and excludes private equity, infrastructure and real assets. This makes the Future Fund one of the region's largest hedge fund investors in dollar terms, and on par with the percentage allocations by the high profile Harvard and Yale university foundations in the US.
Chin says the saving grace for the local hedge fund industry is a combination of the country's sizeable high-net-worth investors, and support from offshore investors. These two categories of investors account for 42.2% of Australian hedge fund industry assets. Australian institutional investors (mostly pension funds) and wholesale (mostly financial planning firms) investors contribute 34.8% and 23% respectively, according to his study at www.basispoint.com.au
The Australian high-net-worth sector includes 478,000 Self Managed Super Funds (SMSF) which are effectively mini-pension funds run by wealthy investors who typically make their own asset allocation decisions. These SMSFs control $439 billion in total, (about a third of the nation's pension pool) or some $918,000 each on average.
The local hedge fund industry has also been boosted by 12 fund ‘incubators' or multi-affiliate firms who take equity stakes in managers and provide operational and marketing support. The top seven incubators support 60 hedge and boutique managers, making them an influential local force.
Chin is optimistic about the growth potential of the Australian hedge fund industry given this unique combination of a large high-net-worth investor base, powerful industry incubators and the Future Fund which is leading the institutional charge towards more hedge fund allocations…but hopefully in future to more local talent.
This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.