Asian promise – a hedge fund seeder explains why to look East
A handful of European investors, in the UK and on the Continent, recently boosted their seeding of hedge funds in Asia – almost a lone region whose capital markets still exhibit hope for growth.
Patric de Gentile-Williams is chief operating officer of London-based hedge fund financier FRM Capital Advisors.
FCA last October made its second investment in an Asia-focused manager, by providing $50m to San Francsico-based, Asia Pacific-focused firm Sensato Capital Management.
Sensato was founded in 2009 by Ernest Chow and Jonathan Howe, both former senior managers at Barclays Global Investors.
De Gentile Williams (pictured) gives Investment Europe his views on seeding in Asia, the potential and pitfalls, and why he sees worth in doing it.
Who are the main groups in Asia interested in seeding hedge funds – is it institutional allocators such as pension funds, or family offices, private banks or wealth managers?
We see interest from all types of investors in seeding, where the investor is either already allocating or considering allocating to major seed capital providers like us, and a handful of others. In terms of investors seeding directly, very few have the resources or experience, so when this happens it is usually because of an existing relationship between the manager and the investor.
Are Asian allocators looking closer to home for seeding opportunities and investments?
I think most Asian allocators currently have the bulk of their alternatives allocations with US and European based managers. This is not surprising as most of their wealth is generated in the region, so a natural diversification is to look outside of Asia. Then, when they want to exploit Asian opportunities, it is easier to do it with the western managers they already know. There are, however, signs that Asia’s investors are starting to allocate locally and we think that will increase as the industry develops. This will be a strong catalyst for growth in the Asian alternatives industry.
What do you feel is the case for putting seeding money to work in Asia?
There are two general arguments for the region. Firstly, the markets are not homogeneous and therefore have significant structural valuation differences, which managers can exploit, leading to potentially greater returns. The second is that Asia is the fastest growing economy, and markets are expected to grow commensurately. Allocators are therefore turning their attention to the region, and we would expect Asian-focused strategies over the long term to grow faster than western ones, simply based on the relative growth of economies.
Are there compromises seeders must make with Asian funds, either in terms of operational infrastructure, or expected asset growth, as funds there seem to be generally smaller than European and US counterparts?
I cannot speak for other seeders, but we apply the same criteria globally and would not make any compromise based on region. That said, nothing is ever perfect and any investment involves some form of compromise. We are more concerned with the potential of the Asian industry than its current size. When we seed, we look for managers with the capacity to manage their strategy effectively and to build a scalable business. As markets grow and become more liquid, capacity will continue to grow and provide scale to the industry.
A seeder might furnish a new manager with a list of prospective investors, to help the business grow. It seems many financiers in Asia are themselves Asian – so does this activity fall away when it comes to European financiers backing Asian funds?
Firstly, I would not overstate the level of introductions that go on, but clearly this does happen. Speaking for ourselves, we are a global group, so we have investors and offices in both regions. When we introduce western managers to investors, there will be a number of Asian investors in that group, and when we introduce Asian managers to investors, there will be a lot of western allocators in the group. If anything, this makes the introductions we make to Asian managers more valuable, as those investors are not on the manager’s doorstep and so potentially less likely to be known to the manager.
How, if at all, does a due diligence on Asian funds differ from Europe or the US – are there things you have to pay more attention to in Asia?
The main challenge is distance – unless you have significant resources in the region it can be more expensive to do due diligence. It is also a smaller industry, so building a team around a hedge fund manager takes longer and can be harder. For example, experienced chief operating officers are more difficult to find.
What are the sources of good managers in Asia – are they second generation managers from existing hedge funds, or from banks’ proprietary trading desks?
The sources are the same as elsewhere, but there are fewer ex-prop traders or second generation hedge fund people around, as the industry is smaller and younger. This is completely to be expected, as it simply reflects the size and maturity of the hedge fund and investment banking industries is Asia.
In terms of where you see most potential for investment in Asia, is it mainly start-ups, or acceleration capital, or both?
It is a mixture, and I think the proportions are similar to elsewhere. However, the last nine months have been pretty reasonable for asset raising in Asia, so I wouldn’t be surprised to see the number of attractive acceleration trades drop somewhat.
Is a main attraction to pick managers only active in Asian markets, due to their local insight, or do you also look for managers in Asia with a more global focus?
We look for managers who have a competitive edge of some form in their investment process. If we can see a reason why being based in Asia provides some sort of advantage, then we would happily invest with an Asian-based, globally-focused manager. It is easy to understand why an Asian-based Asian-focused manager may have an informational advantage over a New York based manager, for example, so it is logical to look at managers in Asia for Asian investing. But if they can demonstrate a wider advantage we would be happy to consider a wider mandate.
A small handful of Asian funds this year have raised $500m-plus, do you see this as a trend that could continue?
Absolutely, I see this as the beginning of a trend. This is simply Asia catching up with London and New York.