AIMA

The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

Trust and transparency crucial as Asian hedge funds compete for assets

Marie-Anne Kong

PwC Hong Kong

Q2 2012

Q2 edition

 


Asia’s hedge fund managers are facing a dilemma. Operating from the world’s fastest-growing economies, with a broadening array of financial tools available to them, they have a strong investment story to tell. Yet in order to become billion-dollar managers they need to raise assets from international institutional investors, many of them from the US and Europe, which expect the high standards of ‘trust and transparency’ typically associated with the largest international asset managers.

In recent years, and especially since the credit crisis, large institutional investors such as pension funds, insurance companies, sovereign wealth funds and endowments have become the biggest hedge fund investors. These institutions are increasingly adopting a ‘trust, but verify’ mentality. In other words, they will trust hedge fund managers with their capital, but they will also want to verify the claims made by these managers in their marketing presentations and regular communications.

Institutional investors are requesting higher standards of governance and controls worldwide. Demonstrating the move towards uniform practices, the Hedge Fund Standards Board (HFSB) announced a drive in February 2012 to extend its support in Asia and North America. Backed by more than 50 of the leading international investors in hedge funds, the HFSB aims to create a framework of transparency, integrity and good governance.

Perceiving a gap between the expectations of the world’s large institutional investors and the reality in Asia’s young hedge fund sector, PwC set out in the autumn of 2011 to interview organisations from across the region’s value chain1, to discover to what degree these factors are influencing the fortunes of managers. We then polled delegates at our PwC Asia-Pacific Alternative Investments Conference in Hong Kong and Singapore in November 2011. What we found was a wide divergence in ‘trust and transparency’ standards between different hedge fund managers.

Our research shows that some Asian hedge fund managers are rising to the challenge. They are building fund governance and firm infrastructure that match up to the most exacting international institutional requirements. They and their service providers are backing this with the transparency that allows investors to verify performance, asset information and operational controls. As a result, the region’s hedge fund sector is polarising, and a small number of managers command a disproportionate amount of assets2.

Yet Asia is different from other parts of the world. Precisely because the market is relatively young, and investment prospects relatively attractive, some investors are likely to accept higher levels of operational risk than they would elsewhere in the world. Asian high-net-worth investors are growing in number and are willing to accept operational risk; equally some institutions recognise that smaller managers have to control costs. Even so, in the past few years the new managers that have built sophisticated infrastructure have tended to reach US$1 billion in size more quickly than others.

A small group of managers has successfully combined strong performance with institutionalised infrastructures, governance and transparency. These managers have realised the importance of meeting the governance and transparency demands of the pension funds, endowments, sovereign wealth funds and others that increasingly are the sector’s dominant investors.

 

Changing investor base

 

Like hedge funds in other regions, Asian hedge funds are increasingly reliant on institutional investment. According to Deutsche Bank’s Alternative Investment Survey 2012, institutions account for well over half of investors in Asian alternatives funds by number. What’s more, the 2011 Preqin Global Investor Report Hedge Funds confirms that institutional investors have been increasing their allocations to hedge funds globally in the past five years.

 

Changes in source of hedge fund capital over five years

 

PwC graph - web

 

Source: 2011 Preqin Global Investor Report: Hedge Funds

 

While Asian institutional investors – such as superannuation funds and sovereign wealth funds – are growing in size, European and US investors still account for over half of total allocations to hedge funds in Hong Kong, the largest Asian hedge fund centre. According to the Hong Kong Securities and Futures Commission’s March 2011 hedge fund survey3, US investors made up 36.1% of allocations and European investors represented 24.3%.

The West’s pension funds are upping their allocations to Asian alternative investments, and there is no sign of this abating. They are diversifying from their home markets, where returns are expected to be low, seeking investments offering exposure to Asia’s superior economic growth.

 

Looking to the future

Going forward, this means Asian hedge fund managers need to identify and target specific investor bases. If they wish to raise institutional money, they will need to make the necessary investments in infrastructure and controls, while also providing sound fund governance. They will need to demonstrate the measures they have put in place through greater transparency.

Data from our PwC Asia-Pacific Alternative Investments Conference in November 2011 showed that smaller managers without the scale to build ‘institutional’ type infrastructure realise this and are seeking capital from Asia’s new wealthy. Some 44% of delegates viewed high-net-worth individuals and family offices as their most important investor bases. A further 38% saw institutional investors (including sovereign wealth funds) as their primary investors, and 18% were looking to fund of funds.

As Asia’s fast-developing economies create a burgeoning class of potential high-net-worth investors, so regional managers might choose to avoid building ‘institutional’-type infrastructure. But managers that don’t have institutionalised infrastructure are subjecting themselves to various operational and compliance risks.

 

marie-anne.kong@hk.pwc.com

www.pwchk.com



[1] We interviewed approximately 20 organisations, including Asian hedge fund managers, investors (funds of funds, pension funds and endowments), administrators, prime brokers, consultants and industry associations

[2] Asia’s 10 largest hedge funds manage about 30% of $144.65bn hedge fund assets at end June 2011, AsiaHedge

[3] Report of the Survey on Hedge Fund Activities of SFC-licensed Managers/Advisors, March 2011

Back to Listing

Main Menu

  1. Home
  2. About
    1. Our Core Objectives
    2. AIMA's Policy Principles
    3. Meet the team
    4. AIMA Council
    5. Global Network
    6. Sponsoring Members
    7. Global Partners
    8. FAQs
    9. Opportunities at AIMA
  3. Join AIMA
    1. Benefits of Membership
    2. Membership Fees
    3. Application form
  4. Members
    1. AIMA DDQs
    2. AIMA Annual Reports
    3. AIMA Governance
    4. AIMA Logo
      1. Policy note
    5. AIMA Members' List
    6. AIMA Review of the Year
    7. Committees and Working Groups
    8. Weekly News
    9. Update Profile
  5. Investors
    1. AIMA Investor Services
    2. AIMA Members' List
    3. Investor Steering Committee
    4. Update Profile
  6. Regulation
    1. Asset Management Regulation
      1. EU Asset Management Regulation
        1. AIFMD
        2. European Capital Markets Regulation
        3. MiFID / MiFIR
        4. UCITS
        5. European Venture Capital Directive
        6. Shareholder Rights Directive
        7. European Long Term Investment Fund Regulation
        8. Loan Origination Funds
        9. Capital Raising
        10. AIFMD-Related Events
      2. US Hedge Fund Adviser Regulations
        1. Registration and Reporting
        2. Incentive-Based Compensation
        3. JOBS Act
      3. Asia Pacific Asset Management regulation
      4. Other Jurisdictions’ Asset Management Regulation
      5. Systemically Important Financial Institutions ('SIFIs')
      6. Remuneration
        1. UK
        2. United States
        3. CRD IV and CRR
        4. AIFMD
        5. MiFID
      7. Shadow Banking
      8. Volcker Rule
      9. Other
      10. Systemic Risk Reporting
      11. Dealing Commission
      12. Corporate Governance
      13. Securitisation
    2. Markets Regulation
      1. Bank/Capital Regulation
        1. Capital Requirements Directive
        2. EU Bank Structural Reforms
      2. Derivatives/Clearing
        1. EMIR
        2. MiFID II / MiFIR - Derivatives
        3. MAD / MAR
        4. Dodd-Frank Act Title VII
        5. Hong Kong
        6. IOSCO
        7. Singapore
      3. High Frequency Trading
        1. ESMA Guidelines
        2. MiFID II / MiFIR - HFT
        3. MAD / MAR
        4. Flash Crash
        5. IOSCO
        6. Germany
        7. CFTC Automated Trading
      4. Insurance Regulation
        1. Solvency II
      5. Market Abuse
        1. MAD / MAR
        2. Indices as Benchmarks
      6. Position Limits
        1. MiFID II - Commodities
        2. CFTC Position Limits
      7. Resolution of Financial Institutions
        1. Europe
          1. EU Bank Recovery and Resolution Directive
          2. EU Non-Bank Recovery and Resolution
        2. CPSS-IOSCO
        3. Financial Stability Board
        4. UK
        5. USA
      8. Shadow Banking
        1. International Shadow Banking
        2. EU Shadow Banking
      9. Short Selling
        1. EU Short Selling Regulation
        2. Hong Kong Short Selling Regulation
        3. US Short Selling Regulation
        4. Short Selling Bans
        5. Securities Settlement
      10. Trading
        1. Dodd-Frank Act
        2. MiFID Portal
    3. Tax Affairs
      1. Automatic Exchange of Information (AEOI)
        1. FATCA
        2. EU - AEFI
        3. OECD - Global Standard on AEFI
      2. Australia - Investment Manager Regime (IMR)
      3. Base Erosion - Profit Shifting (BEPS)
      4. FAIFs and FINROFs
      5. FIN 48 and IAS 12
      6. Financial Transaction Tax (FTT)
      7. UK Investment Management Exemption (IME)
      8. UK Offshore Funds Regime
      9. Other
    4. AIMA's Policy Principles
    5. Search
    6. Resources
      1. Guidance Notes
      2. Jurisdictional Guides
      3. Noticeboard
        1. AEOI: FATCA and other regimes
        2. AIFMD
        3. BEPS
        4. CFTC Registration and Exemptions
        5. Corporate Governance
        6. Dealing Commission
        7. Derivatives
        8. FTT
        9. High Frequency Trading
        10. MiFID / MiFIR
        11. Other Hot Asset Management Topics
        12. Other Hot Markets Topics
        13. Other Hot Tax Topics
        14. Position Limits
        15. Trading
        16. UCITS
        17. UK Partnership Tax Review
        18. US State and Local Taxes
        19. Volcker Rule
      4. Hedge Fund Manager Training
      5. Quarterly Regulatory Update
      6. Webinar Programme
      7. Regulatory Compliance Association
        1. About the Regulatory Compliance Association
        2. RCA Curricula and initiatives for alternative investment firms
        3. Meet the regulators and Sr. Fellows
  7. Education
    1. Research
      1. AIMA Research
      2. Industry research
      3. Search research documents
    2. "The Case for Hedge Funds"
      1. Global Hedge Fund Industry Paper: The value of our industry
      2. The Value of the Hedge Fund Industry to Investors, Markets and the Broader Economy: Research commissioned by AIMA and KPMG
      3. The Evolution of an Industry: KPMG/AIMA Global Hedge Fund Survey
      4. Contributing to Communities: A global review of charitable and philanthropic activities by the hedge fund industry
      5. Beyond 60-40: The evolving role of hedge funds in institutional investor portfolios
      6. The Cost of Compliance: Global hedge fund survey by AIMA, MFA and KPMG
      7. Capital Markets and Economic Growth: Long-term trends and policy challenges
      8. Apples and Apples: How to better understand hedge fund performance
      9. The Extra Mile: Partnerships between hedge funds and investors
      10. Key articles by AIMA on the case for hedge funds
    3. AIMA Journal
      1. Recent issues
      2. Search AIMA Journal articles
      3. AIMA Journal Archive
    4. AIMA Guides to Sound Practices
    5. AIMA guides for institutional investors
    6. CAIA Association pages
      1. Fundamentals of Alternative Investments
    7. Regulatory Compliance Association pages
      1. About the Regulatory Compliance Association
      2. RCA Curricula and initiatives for alternative investment firms
      3. Meet the regulators and Sr. Fellows
    8. Certified Investment Fund Director programme
    9. Services to Start-up Managers
    10. Useful Websites
    11. Glossary
  8. Events
    1. AIMA Events
    2. AIMA webinars
    3. Industry events
  9. Media
    1. Press Releases & Statements
    2. AIMA's blog
    3. Media Coverage
      1. Articles by AIMA
        1. Archive
      2. AIMA in the news
      3. Video interviews
      4. Industry news
    4. Media Contact
    5. Press Materials

Sub Menu

  1. Education
    1. AIMA Journal
    2. Bibliography
    3. CAIA Designation
    4. Research
    5. Roadmap to Hedge Funds
    6. AIMA's Investor Steering Committee Paper
    7. Glossary
  2. Regulatory, Tax, Policy & Government Affairs
    1. AIMA Position Papers
    2. AIMA Responses
      1. Australian Tax Office
      2. Authority for the Financial Markets
      3. Committee of European Banking Supervisors
      4. Committee of European Securities Regulators
      5. Commodity Futures Trading Commission
      6. Dubai Financial Services Authority
      7. European Commission
      8. European Securities and Markets Authority
      9. Swiss Financial Market Supervisory Authority
      10. Financial Services Authority (UK)
      11. Financial Services and the Treasury Bureau
      12. Guernsey Financial Services Commission
      13. HM Revenue & Customs
      14. HM Treasury
      15. Independent Commission on Banking
      16. IOSCO
      17. Monetary Authority of Singapore
      18. Securities and Exchange Board of India
      19. Securities and Exchange Commission (USA)
      20. Securities and Futures Commission
      21. Singapore Exchange
      22. The Takeover Panel
      23. US House of Representatives / Senate
      24. Federal Deposit Insurance Corporation
      25. Financial Stability Oversight Council
      26. Financial Stability Board
      27. US Treasury
      28. Internal Revenue Service
      29. US Federal Reserve
      30. Financial Industry Regulatory Authority (FINRA)
      31. Council of European Union
      32. Hong Kong Exchanges and Clearing
      33. House of Lords
    3. AIMA Summaries
      1. CESR
      2. European Commission
      3. Financial Services Authority (UK)
      4. HM Revenue & Customs
      5. HM Treasury
      6. IOSCO
      7. Securities and Exchanges Commission
      8. FSOC
      9. CFTC
    4. Guidance Notes
    5. Jurisdictional Resource
    6. AIMA Noticeboard
      1. EU Directive on Alternative Investment Fund Managers
      2. FSA Remuneration Code
      3. Short Selling
      4. US Dodd-Frank Wall Street Reform and Consumer Protection Act
      5. UK Stewardship Code
      6. Securities Law Directive
      7. EU Directive on Alternative Investment Fund Managers - Level II
      8. EU Directive on Markets in Financial Instruments (MiFID)
      9. International Financial Centres
      10. Bribery Act
      11. Market Abuse Directive
      12. MF Global
      13. FATCA
      14. FTT
      15. Other Tax Issues
    7. AIMA Regulatory Update
  3. Sound Practices
    1. Due Diligence Questionnaires
    2. Guides to Sound Practices
  4. Start-Up Service Providers
  5. Useful Websites