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AIMA/S3 study on Basel III impact

AIMA has published a member survey on how the cost and availability of financing is being impacted by Basel III. The survey is short and straightforward and will take you no more than 20 minutes to complete. You will be able to view the results later this year when AIMA and S3 Partners publish a research paper on the findings. Access the survey here.

The survey looks at:

o    How prime brokerage and financing relationships have changed over the last two years and the reasons for this, covering both cost and nature of service

o    How hedge fund managers expect these relationships to evolve further in the coming years as Basel III rules bite

o    How the hedge fund industry understands some of the key concepts that underpin banks’ response to Basel III, from “optimization” to “collateral management”

All questions in this survey are fully optional and it is open to any hedge fund manager to complete regardless of whether you are an AIMA member or S3 Partners client. The survey should be completed by an individual within the firm who is familiar with your prime brokerage and financing relationships. For further information, contact Adam Jacobs.


EU – AIMA response and ESMA reports on the EMIR Review

Last week AIMA submitted a response to the European Commission consultation on the EMIR Review. The response set out AIMA’s central positions on possible changes to the EMIR framework as part of the formal review of EMIR currently being undertaken by the European Commission. Among other things, the response called for: (i) the availability of third-country equivalence under Article 13 of EMIR for transactions involving at least one counterparty ‘subject to the rules of’ an equivalent third-country jurisdiction; (ii) the replacement of dual-sided reporting with a robust single sided mechanism; (iii) the abolition of the frontloading requirement currently contained within Article 4(1)(b)(ii) of EMIR; (iv) the development of a fast-track process for the suspension of the EMIR mandatory clearing obligation; (v) an alternative mechanism for direct access to CCPs rather than as a formal ‘clearing member’; and (vi) the swift removal of issues currently experienced around the definition of an ‘OTC Derivative’ under Article 2(7) of EMIR.  In addition to industry feedback relating to its consultation, the European Commission last week received four reports published by ESMA on the functioning of the EMIR framework. Three of the reports, required under Article 85(3) of EMIR, cover: non-financial counterparties; pro-cyclicality; and the segregation and portability for central counterparties (CCPs), respectively. The fourth report responds directly to the European Commission’s EMIR Review and includes recommendations on amending EMIR in relation to: the clearing obligation; the recognition of third country CCPs; and the supervision and enforcement procedures for trade repositories. Of particular interest to AIMA are ESMA’s calls for the Commission to provide for the suspension of the clearing obligation upon particular market conditions, as well as the abolition of frontloading and an entire rethink of the EMIR equivalence and recognition process for CCPs.


The European Commission will now use the consultation responses and the ESMA reports to assist in the compilation of a final report that the Commission will submit to the European Parliament and European Council. If members have any questions or comments, please contact Oliver Robinson or Adam Jacobs

Other news


US -  SEC Division of Corporate Finance Interprets “General Solicitation”

The Securities and Exchange Commission’s Division of Corporation Finance has recently updated its interpretations related to the scope of the term “general solicitation” as used in SEC Rule 506 of Regulation D under the Securities Act of 1933.  These interpretations confirm and reiterate many previously existing views and include some new flexibility around the communications and activities that could be undertaken without being deemed a general solicitation.  The interpretations also provide further guidance on the concept of “pre-existing substantive relationships”.  If you have any questions in relation to this, please contact Jennifer Wood.


EU – European Commission responds on Article 13 equivalence

The European Commission has responded to the Joint Trade Associations letter AIMA sent alongside a number of other trade associations on 22 June 2015 positing questions on a number of issues around equivalence under Article 13 of EMIR and Article 33 of MiFID. Jonathan Faull of the European Commission, responding on behalf of Commissioner Hill, has confirmed that the wording of Article 13 of EMIR does require at least one counterparty to a trade to be established in an equivalent third-county in order for the transaction to benefit from equivalence of third country clearing, reporting and risk mitigation rules. The response letter also confirms that the European Commission may move ahead with an equivalence determination under Article 13 on a rule-by-rule basis, rather than requiring a single holistic determination of the equivalence of numerous third-country requirements. If members have any questions, please contact Oliver Robinson or Adam Jacobs.


Luxembourg - FATCA deadline postponed to 31 August 2015

On 31 July the Luxembourg tax authority (‘Administration des contributions directes’) issued a circular granting the exceptional extension of the deadline from 30 June to 31 August 2015 for FATCA reporting in Luxembourg. According to the Intergovernmental Agreement (“IGA”) on FATCA signed between the USA and Luxembourg as well as the Luxembourg regulations implementing the relevant provisions this Agreement, each Luxembourg Reporting Financial Institution will have to file a report to the Luxembourg tax authorities prior to 30 June of each year. This report will have to include each US reportable account and must be done in a specific format defined by the circulars issued by the Luxembourg tax authorities. If you require further details please contact Paul Hale or Enrique Clemente.

Global – IBA seeks stakeholder views on proposed changes on LIBOR administration

ICE Benchmark Administration (IBA) has been in touch with AIMA in relation to its work on the evolution of ICE LIBOR to a transaction-based rate, in line with the recommendations of the FSB. IBA recently released a Second Position Paper for which it is seeking feedback from all stakeholders who may be impacted by changes in calculation methodology for LIBOR. A questionnaire is available on the IBA website, to which the latter will be accepting responses until Friday 16 October 2016. If you have any questions, please contact Andrew Hill.


Global – OECD takes further steps for implementing automatic exchange of information

On 7 August, the OECD released three reports to help jurisdictions and financial institutions implement the global standard for automatic exchange of financial account information. The first publication is a Common Reporting Standard Implementation Handbook (here), which will provide practical guidance to assist government officials and financial institutions in the implementation of CRS, and to help promote the consistent use of optional provisions or identify areas of alignment with FATCA. The Handbook is intended to be updated on a regular basis. The other OECD publications are an updated edition of the report on Offshore Voluntary Disclosure programmes (here) and a Model Protocol to Tax Information Exchange Agreements that provides the basis for jurisdictions wishing to extend the scope of their existing TIEAs to also cover the automatic and/or spontaneous exchange of tax information. If you require further details please contact Paul Hale or Enrique Clemente.


India - Minimum Alternative Tax (MAT) – Shah Committee Report and Castleton appeal

On 24 July, the Shah Committee submitted its report on the MAT, which has not been made public by the Indian Government. AIMA submitted a written representation (here) to the Committee on 22 June, arguing that the MAT provisions should not apply to Foreign Portfolio Investors (FPIs) for years prior to 1 April 2015 (the position from that date has been clarified by legislation). We understand that the report concludes that foreign investors are not liable to MAT for that period. However, the report seems to be silent on the position of foreign companies that are not FPIs or Foreign Institutional Investors (FIIs) because its terms of reference as framed by the Finance Ministry did not mandate the Committee to review this aspect, even though many of the MAT dispute cases concern such foreign companies. Given its relevance, the Indian Supreme Court has decided to adjourn to 29 September 2015 the Castleton case appeal hearing so that the court may consider the Shah Committee report. If you require further details, please contact Paul Hale or Enrique Clemente in London, Heide Blunt in Hong Kong or Merima Arleback in Singapore.


EU - ICMA study on evolution of European repo market

ICMA has approached AIMA regarding a study that it is conducting into the current state and future evolution of the European Repo Market. The study will be largely qualitative and based on interviews with a broad range of market participants, including repo trading desks, buy-side users of the product, voice and electronic intermediaries, infrastructure providers, as well as central banks and DMOs. The resulting report is envisaged to be similar in format to the 2014 ICMA study into the European Corporate Bond markets.

If you would be happy to be interviewed for this project, please contact Andy Hill at ICMA. Interviews can be by phone, and should take between 30 and 45 minutes. Ideally ICMA would like to interview the main person(s) responsible for the firm’s European repo/funding activity. All responses are anonymized and will only be presented in aggregate. All participants will also have the opportunity to review the draft report before it is published.

The geography of hedge funds

Melvyn Teo

Lee Kong Chian School of Business, Singapore Management University

Q2 2007


This article is the winner of the 2006 AIMA Singapore/INSEAD Research Award, which was sponsored by the Chartered Alternative Investment Analyst (CAIA) Association

Does distance affect hedge fund performance? Anecdotal evidence suggests that proximity to investments may be helpful for hedge funds. Being nearby allows hedge funds to maintain close contact with senior management. Fund managers can learn valuable information from other local firms along the supply chain by being on the ground. Nearby funds, who are also substantial stakeholders, can more easily engage in constructive shareholder activism.

In this paper, we investigate the link between funds’ proximity to investment markets and risk-adjusted returns. We show that nearby funds outperform distant funds on a risk-adjusted basis by on average 5.28% per year (t-statistic = 4.44). The hypothetical strategy of buying nearby funds and shorting distant funds yields risk-adjusted returns of 4.54% per year (t-statistic = 3.09). This spread is robust across all major investment regions and is substantially higher for the emerging market where public informational disclosure is weaker. These results suggest that nearby hedge funds enjoy an informational advantage.

Our study focuses on hedge funds that invest primarily in Asian financial markets. To determine distance, we use fund investment region and location information. For example, we classify funds investing in Asia ex Japan but located in the United States or the United Kingdom as distant funds. Conversely, we classify funds investing in Asia ex Japan and located in Hong Kong or Singapore as nearby funds.

1. Data

We collect data from Eurekahedge and AsiaHedge. The sample consists of monthly fund return data from January 1999 to December 2003. Since Eurekahedge only started collecting fund return data from 2000 (but includes fund returns since inception), to ameliorate survivorship bias, we focus on the period from 2000 onwards.

Our sample also includes data on management fee, performance fee, redemption period, investment style, investment region, fund location, fund size, family size, and minimum investment. We take these characteristics, which are recorded in year 2003, as constant over the sample period. AsiaHedge records fund and family size in distinct ranges. Hence, we convert size values to ten size categories (see the Appendix). Naturally, the sample includes dead funds. Of the 325 funds with at least one month of return data, 23 are dead funds.


Figure 1 - Summary Statistics

Geography of Hedge Funds - Figure 1


As mentioned, the data contains information on fund investment region and fund location and for some funds, research office location. This allows us to determine whether funds have a physical presence (head or research office) within their investment region. In Table 1, we breakdown the funds in our sample by investment style and region, and report various summary statistics.

2. Asset based style factors for hedge fund returns

First, we augment the Fung and Hsieh (2004) model so as to better explain risk in Asian hedge funds. To identify additional factors, we analyse the principal components of style/region intersections with at least five funds. Table 2 reports the R-squares from the regressions of fund style/region returns on the top ten components. The R-squares reveal that the dominant first component, which accounts for about 51% of the variation in fund returns, is likely to be an equity factor since it well explains Equity Long/Short fund returns.

Figure 2 - Explaining hedge fund returns: A principal components analysis

Geography of Hedge Funds - Figure 2


To link the first component to market prices, we compute its correlations with the Datastream Asia Ex Japan, Asia, Pacific Basin and Japan equity market indices. Since the correlation with the Asia Ex Japan index, at 0.82, is the highest, we augment the model with the Asia Ex Japan (henceforth ASIAMRF) and the Japan (henceforth JAPMRF) index excess returns:


Geography of Hedge Funds - Equation 1


where rim is the monthly return on portfolio i in excess of the risk-free rate, SNPMRF is the S&P 500 return minus risk-free rate, SCMLC is the Wilshire small minus large cap return, BD10RET is the change in the constant maturity yield of the 10-year Treasury and BAAMTSY is the change in the spread of Moody's Baa – 10-year Treasury. PTFSBD, PTFSFX, and PTFSCOM are the bond, forex, and commodities PTFS respectively, where PTFS is primitive trend following strategy [see Fung and Hsieh (2004)]. In results not reported, we find that the augmented factor model achieves an adjusted R-square of 63% that is higher than that achieved by the non-augmented model (i.e., 52%), underscoring the efficacy of the augmented factor model.

3. Geography and hedge fund risk-adjusted performance

3.1. The cross-section of hedge fund alpha
To investigate the relationship between geography and hedge fund alpha, we regress the cross-section of hedge fund alpha, measured relative to the augmented Fung and Hsieh (2004) model, on an investment region presence variable (henceforth PRESENCE). We set PRESENCE equal to one for hedge funds with a head office or research office in their respective investment regions, and equal to zero otherwise. For funds with at least 24 months of returns, we calculate monthly fund alpha or as fund excess returns minus the factor realisations times loadings estimated over the entire sample period:


Geography of Hedge Funds - Equation 2


Then, we estimate the following pooled OLS regressions:


Geography of Hedge Funds - Equation 3

where PERFFEE is performance fee, MGTFEE is management fee, REDEMP is redemption period, MININV is minimum investment, FUNDSIZE is fund size, FAMSIZE is family size, STYLEDUM is investment style dummy and YRDUM is year dummy. The multivariate regression controls for other fund characteristics that may affect returns.


Figure 3

Geography of Hedge Funds - Figure 3 


The results are striking. The coefficient estimate on PRESENCE in the univariate regression (leftmost column of Table 3) suggests that nearby funds outperform distant funds by 0.44% per month or 5.28% per year. Even after controlling for the other fund characteristics, nearby funds still outperform distant funds by 4.68% per year. Both these effects are statistically significant at the 1% level. Since the pooled OLS regressions ignore cross-correlation in residuals, we also estimate regressions run using the Fama and MacBeth (1973) method. The Fama-MacBeth regression estimates reported in Table 3 strongly corroborate our prior findings.

3.2. Sorts on hedge fund geography

Next, we measure the spread between equal-weighted portfolios of funds with (portfolio A) and without (portfolio B) investment region presence. Panel A of Table 4 shows that the hypothetical strategy of buying nearby funds and shorting distant funds yields a risk-adjusted return of 4.54% per year (t-statistic = 3.09). This suggests that astute hedge fund investors can benefit from the local informational advantage of nearby funds. Complementing these results, Figure 1 illustrates the monthly cumulative average residuals (henceforth CARs) from portfolios A and B. CAR is the cumulative difference between a portfolio's excess return and its factor loadings multiplied by the factor realisations. The CARs indicate that portfolio A consistently outperforms portfolio B over the entire sample period.


Figure 4


Geography of Hedge Funds - Figure 4


Figure 5

Geography of Hedge Funds - Figure 5


Dovrak (2005), and Choe, Kho, and Stulz (2005) argue that the local/foreign informational asymmetry is particularly severe in Emerging Markets. To check this, we break down the analysis by region for regions with least 20 funds. The spread alphas in Panels B – E of Table 4 indicate that the results are robust across regions. They are consistently above 4% per year for all four investment regions. Moreover, the spread alphas for Asia including Japan and emerging markets are statistically significant at the 1% level. Indeed, the spread alpha is highest and most significant for emerging market funds (t-statistic = 2.77). This dovetails with the intuition that any local informational advantage should be strongest in emerging markets.

4. Conclusion

The results in this paper tell a consistent story. Hedge funds with a physical presence in their investment region outperform funds without a physical presence on a risk-adjusted basis. The difference in performance manifests in the cross-section of fund alpha and in fund portfolio sorts. Moreover, the overperformance is exceptionally strong for investment regions (e.g., Emerging Markets) where the local/foreign information asymmetry is likely to be acute. Collectively, these results suggest that nearby hedge funds enjoy a local informational advantage.

Choe, H., Kho, B.C., Stulz, R., 2005. Do domestic investors have an edge? The trading experience of foreign investors in Korea. Review of Financial Studies 18, 795-829.

Dvorak, T., 2005. Do domestic investors have an information advantage? Evidence from Indonesia. Journal of Finance 60, 817-839.

Fama, E., MacBeth, J.D., 1973. Risk, return, and equilibrium: empirical tests. Journal of Political Economy 81, 607-636.

Fung, W., Hsieh, D., 2004. Hedge fund benchmarks: A risk based approach. Financial Analyst Journal 60, 65-80.

Ragaas De Ramos, R., 2006. Hong Kong outpaces Singapore in snaring hedge fund assets. The Wall Street Journal, May 15 2006.



Fund size category
Fund size (in millions US$)



1 - This article is a summary. The full research paper can be found below.

2 - – AIMA is a co-founder of the CAIA Association

3 - A Wall Street Journal report stated that a distinct advantage for Hong Kong vis à vis Singapore as a hedge fund hub is its proximity to China (Raagas De Ramos, 2006).

4 - The Japan equity factor (JAPMRF) is included to help explain the returns of Japan only funds.


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