Paul Smith moved from London to Hong Kong to work in Asia’s hedge-fund industry almost 17 years ago, and he rode the boom to its peak. Last year, like other industry veterans, he quit.
“I decided not to wait the cycle out but to do something more productive with my time,” said Smith, 53, who remains in the city heading the Asia-Pacific office of the nonprofit CFA Institute, the global association of chartered financial analysts. “The hedge-fund industry in Asia will continue to struggle to raise funds for the next few years as banks continue to have liquidity issues.”
Hedge-fund managers, traders and analysts in Asia are quitting as assets have failed to recover after the 2008 global financial crisis, and trading losses have left a majority of funds unable to collect performance fees. They’re moving to mutual funds, endowments, consulting firms and companies outside of the money-management business, often at a cut in pay.
Asian hedge-fund assets are 28 percent below their 2007 peak, according to data provider Eurekahedge Pte. Globally, money overseen by the funds increased 21 percent since 2007 to a new high of $2.3 trillion as of December, data from Chicago- based Hedge Fund Research Inc. show.
A total of 296 Asian hedge funds liquidated in the two years to December, 33 more than the number that started. On a global basis, 1,839 new funds outnumber those that shut by 371, according to Eurekahedge.
Sweet Promise
“Five years on, many of these guys are tired of the huge swings in hedge-fund compensation, and some have not tasted the sweet promise of hedge-fund payouts,” said Will Tan, managing director at Singapore-based recruiting firm Principle Partners Pte. “Investors getting increasingly selective, regulatory environment getting tougher, inconsistent performance of hedge funds and the overall state of the finance industry have all contributed to long-time veterans leaving the hedge-fund space for more stable careers in finance.”
Asian hedge-fund assets climbed ninefold to $176 billion from 2000 through 2007, expanding 32 percent in that final year alone, according to Eurekahedge. U.S.-based firms including Citadel LLC, Och-Ziff Capital Management Group LLC and SAC Capital Advisors LP opened Hong Kong offices in that period, according to regulatory records. It was common for traders to leave banks for the hedge-fund world.
Today, the $127.4 billion Asian industry accounts for just 7 percent of global hedge-fund assets, down from 9 percent in 2007, according to Eurekahedge. That’s in contrast with Asia’s more than 30 percent share of global stock market value.
Departing Managers
The Eurekahedge Asian Hedge Fund Index, which tracks the performances of regional funds, trailed the global gauge in three of the past five years, even as the Chinese economy grew 7.9 percent in the fourth quarter, trumping the 1.6 percent expansion of the U.S. economy in the period and the 0.9 percent contraction in Europe.
Just 39 percent of Asian hedge funds were able to charge performance fees by being above their historical peak net asset values, known as high-water marks, at the end of 2012, Eurekahedge estimated in a February report.
A number of Asian hedge-fund managers and traders who joined the industry before its 2007 peak have departed. They include Kenrick Leung, who helped manage an Asia fund for London-based Sofaer Capital Inc. before moving to FrontPoint Partners LLC as a Hong Kong-based fund manager.
Going Elsewhere
FrontPoint, a Greenwich, Connecticut-based fund which managed at least $7.5 billion in assets in 2010, shut down in 2012 following investor withdrawals amid probes into insider trading by a U.S. employee who later went to jail. Leung in May joined Paris-based Amundi Asset Management, which manages 727 billion euros ($956 billion), mostly stocks, fixed-income and money-market products for institutions and individuals.
Chris Seabolt, an American trader in Hong Kong for New York-based hedge fund TPG-Axon Capital Management LP, in July joined Fidelity Management & Research Co., which advises the $1.4 trillion family of mutual funds, as its first Asia head trader. Leung and Seabolt declined to comment for this story.
Others are investing privately because of the lack of suitable jobs and difficulty of raising money for new funds, according to 18-year Credit Suisse Group AG veteran Marvin Kelly, a New York City native who left the Swiss bank when it scaled back proprietary trading in 2010.
Attracting Assets
“Launching a fund is tough in this environment because investors seem to prefer large, well-known managers,” said Kelly, 50, who invests his own and his family’s money through Quaternion Capital Management Ltd.
Asian hedge funds may have had a harder time attracting assets because the industry primarily consists of smaller boutiques without the teams and infrastructures to attract capital from large institutions, according to Alex Mearns, Eurekahedge’s Singapore-based chief executive officer.
“The financial industry has been continually downsizing since the financial crisis, which has resulted in a large number of ex-employees leaving to start hedge funds,” he said. “Many of these managers have now closed shop in the realization that running your own business is actually much harder.”
A bonus can be as high as $50 million a year for a star hedge-fund manager, while hedge-fund base salaries are typically lower than for other, more-stable jobs in the finance industry, according to Principle Partners’ Tan.
$5 Million
One hedge-fund manager Tan knows was earning more than $5 million a year at a U.S.-based hedge fund’s Asia and New York offices before 2008, primarily from performance-related pay, he said. He took a job at an asset-management company where he consistently earns less than $1.5 million annually and prefers the stability, Tan said.
Hong Kong is Asia’s largest hedge-fund center with 32 percent of regional industry assets in the first half of 2012, according to London-based trade journal AsiaHedge. Singapore made up 14 percent of regional hedge-fund assets in the first half last year, it said.
The region’s hedge funds rely on investors in the U.S. and Europe for a large part of their capital. Hedge funds in Hong Kong depended on American and European investors for more than 60 percent of assets, with local money accounting for just shy of 8 percent of capital, the city’s Securities and Futures Commission said in its latest industry survey in March 2011.
Small Funds
Some 54 percent of Asian hedge funds manage less than $50 million, up from 39 percent at the end of 2007, Eurekahedge data show. The risk-management policies of large institutions, such as U.S. and European pensions, insurers and endowments, restrict them to investments in larger funds.
Investors globally in the first nine months of 2012 channeled $43 billion of new capital to hedge-fund managers already overseeing at least $5 billion, an asset size rarely attained by Asia-focused companies, according to Hedge Fund Research. The entire industry took in $31 billion of fresh money in the period, indicating investors were reallocating capital from smaller managers to the largest.
About half of the job candidates that Graham Smith talks to are open to more stable positions with long-only funds or in banking now, while the ratio was much lower before 2008, the London-based recruiter for Options Group said in a telephone interview.
Mounting Competition
The firm has seen a 25 percent increase in the number of hedge funds that have retained it to scout for job candidates globally last year compared with 2011, said Smith. Yet in terms of actual hiring, Asia has been tough in the last couple of years, he added, noting that potential employers are being more patient and selective in seeking talent.
Candidates in Asia also face mounting competition from job seekers in Europe, he said, with about 30 percent of potential hires willing to consider relocating to the region.
“In the last three years, there has been a large increase in the number of people from Europe seeking to make the move to Asia,” Smith said. “This trend has been driven by a decrease in employment opportunities and an increase in taxes in Europe.”
The Confederation of British Industry said in January that the country’s financial industry will lose 43,000 jobs in the six months to March. About 72 percent of the 2,872 employees who left London jobs at nine large banks that required the so-called approved-person registration with the U.K. Financial Services Authority between January 2012 and February 2013 haven’t found new roles to rejoin the register, according to a report posted on eFinancialCareers, a recruitment website.
Further Afield
Some Asian hedge-fund professionals have gone further afield. Sanjiv Bhatia in December joined Harvard Management Co., which oversees the endowment of the university in Cambridge, Massachusetts, after closing down his Isometric Investment Advisors Ltd. in Hong Kong. He’d set up the now- defunct hedge fund in 2009 after running Asian investments for Deephaven Capital Management LLC, a hedge fund in St. Francis, Wisconsin.
Christophe Lee, who worked at FrontPoint Partners after heading SHK Fund Management Ltd., confirmed that he became chief financial officer of Hong Kong-headquartered device maker OrbusNeich Medical Inc. in March 2012. He declined to comment further.
Daren Riley — who last year shut down Riley Paterson Investment Management Pte, a Singapore-based hedge fund he co- founded in 2007 — now advises consultancy New Crossroads Asia, which helps facilitate investment in Southeast Asia, according to its website. Bhatia and Riley didn’t respond to e-mails seeking comment.
Future Fortunes
With banks now adapting to a fresh host of regulatory rules, from new capital requirements to tightened scrutiny over derivatives, the Asian hedge-fund industry’s fortunes seem unlikely to turn soon. Hedge funds in Asia used to rely heavily on wealthy investors making investments through funds of funds, financed partly through bank borrowing, the CFA Institute’s Smith said. That lending has dried up.
“Banks will remain reluctant providers of leveraged finance for the foreseeable future,” said Smith, who came to Hong Kong in 1996 as Asia head of Bank of Bermuda’s fund services business. He rose within HSBC Holdings Plc’s fund services after it acquired the former and stayed until 2006, after which he went to head Hong Kong-based Triple A Partners Ltd. Smith took up his role at CFA Institute in October.
“Given the quantity and scope of the new regulation that already faces banks, plus the additional uncertainty over any new regulation that may be being planned,” Smith said, “it’s difficult to see how banks will be able to stabilize their business models in the near future.”
