Rapid growth in Asia's hedge fund industry raises risks that some inexperienced managers could be caught out by a liquidity crunch, industry figures say. Asian hedge funds, now overseeing more than $60 billion in assets out of a global industry total of $1.0 trillion, are expanding rapidly, drawing in large numbers of fresh recruits. Not all of the newcomers may be able to cope if capital markets hit a major problem, Peter Douglas, principal of Global Fund Industry Analysis (GFIA), told the Academy & Finance and Jetfin conference on Tuesday.
"So far in Asia there have not been a lot of road accidents. One significant concern that allocators should have is that market liquidity (in Asia) is provided by retail investors and foreign capital that can turn on a sixpence."
"Asian capital markets are constrained and less liquid (than elsewhere) and one thing we look at is whether a manager is operating in a market that is beyond his natural capacity."
Hedge fund managers are mindful of how their industry, which has grown rapidly in recent years, wants to avoid a repeat of the collapse of US hedge fund Long Term Capital Management (LTCM) in 1998, which prompted a rescue operation co-ordinated by the Federal Reserve.
High oil prices, recent rises in interest rates in the United States and elsewhere and concerns about the US twin budget and current account deficits have led to concerns that the world economy is likely to log slower growth in 2005 than last year, as a Merrill Lynch survey of fund managers showed earlier this month.
Asia's hedge fund market is a bright growth area in the world's financial industry, but a flood of new money and managers could draw in inexperienced recruits and untrustworthy operators, Douglas said.
Asia's hedge funds are estimated to grow by 20 percent to $90 billion this year, according to Dutch bank ABN Amro. There are about 550 Asian hedge funds, most of them run out of the region, according to fund research and tracking firm Eurekahedge.
Possibly more than 100 Asian hedge funds are due to be launched in 2005, accelerating from the roll-out rate last year, according to Christophe Lee, chief executive officer at SHK Fund Management in Hong Kong, told the same conference.
Hedge fund growth by asset size is expected to continue growing as the region accounts for 15 percent of the world's capital markets while Asia takes only 7 percent of the total hedge fund market, according to data from the Alternative Investment Management Association (AIMA).
"This year we are going to see a continued rate of (hedge fund) growth, the pipeline will be strong this year than last year. A lot more managers are coming out of the prop (banks' proprietary trading) desks and investment banks rather than from traditional fund managers," GFIA's Douglas said.
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