Two smaller Asian hedge funds that have bet on Thai and Southeast Asian stocks have made a killing this year, racking up more than 80 percent gains and ranking among the world's 100 top-performing hedge funds.
-- Institutional investors side-step small funds, start-ups
-- Rising compliance, due diligence add to costs, hurt profits
The Thai Focused Equity (Class A) and Albizia Asean Opportunities funds, however, have received only a trickle of fresh inflows compared to the cash that global investors have been pouring into their larger rivals in Asia.
The fight for assets is likely to extend to 2011 as investors continue to shun smaller funds. Rising compliance costs will also crimp their ability to turn a profit and make it tougher for start-ups in Singapore and Hong Kong to grow.
The reluctance of institutional investors to park assets in smaller players could stymie the development of the $125 billion Asian hedge fund industry since small hedge funds have often been the source of innovative ideas in the West.
Reasons cited by institutional investors for not allocating money to smaller funds include uncertainty as to whether managers can replicate the strong gains they showed in the past as well as concerns about the quality of risk management.
Even if a small fund has performed well, there are doubts if the strategy can continue to work following a surge in assets. "Clients typically want a $100 million minimum," said Christophe Belhomme, chief investment officer of FundQuest, a BNP Paribas unit that manages fund-of-funds. Asian funds are much smaller than their Western counterparts.
About two-thirds of the region's managers have $50 million or less in assets, according to Singapore fund-tracker Eurekahedge, keeping them out of the radar of the influential institutional investors who contribute the most to the flows into the industry.
Over the years, investors have preferred bigger players in Asia, with the trend intensifying in 2008 when a large number of small funds were forced to close due to losses and redemptions.
However, while the money has started coming in and global players show interest in setting up operations in Hong Kong or Singapore, the regulatory environment and higher operational standards demanded by institutional investors continue to pile costs on the region's mostly smaller and younger funds.
Under proposed rules in both the United States and Europe, hedge funds in Hong Kong and Singapore could soon be forced to adhere to Western regulations as well as rules set by domestic authorities, hurting smaller Asian funds in particular by increasing both the cost and complexity of their operations.
"As the operational due diligence process has become more focused, some of the smaller managers simply don't have the resources in order to jump that hurdle," said Glyn Treasure, general manager at the Alternative Investment Management Association, a lobby group for hedge funds.
While the global hedge funds industry is yet to completely regain its strength, rising fund flows, falling liquidation and increasing launches indicate that a recovery is underway.
The September quarter, which marked the fifth consecutive quarter in which hedge fund launches outpaced liquidations, saw 260 new funds globally, data from Hedge Fund Research showed.
That is up from 201 new portfolios in the second quarter and 224 launches during the third quarter of 2009. The industry has seen some $42 billion of net inflows this year globally.
Another plus for hedge funds going into 2011 is that markets and stocks are unlikely to show the same level of correlation and will likely revert to form, benefiting stock pickers and creating opportunities for long/short hedge funds.
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