apr 2007 asian hedge fund services 2007 - hedgeweek · hedge fund market shows its maturity...

Hedge fund market shows its maturity

Opportunityknocks for serviceproviders

Educating theAsian investor onalternatives

Asian Hedge FundServices 2007

Apr 2007

In this issue…03 Asian hedge funds become a moreviable businessBy Peter Douglas

08 Asian market shows its maturityBy Kevin Meehan, Credit Suisse

11 Singapore completes a global footprintBy Dermot Butler, Custom House

12 Opportunity knocks for hedge fundservicesBy Simon Gray

14 Emerging managers look to outsourcingBy Stuart Farr, Linedata Services

17 Developing a long-term presence in AsiaBy Gerry Mintz, PerTrac Financial Solutions

ASIA Hedgeweek Special Report Apr 2007 www.hedgeweek.com | 2

CONTENTS

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Photographs: Discover Hong Kong; Singapore Tourist Board

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While some specialists, and a few globalnames, have had exposure to Asian hedgefunds for 10 years or more, in 2003 globalallocators began to review the universe ofhedge fund managers in Asia more seriously.The following year mainstream hedge fundallocators began to allocate capital to takeadvantage of quality managers, even assome of the more directional capital thatarrived in 2003 left the region. In addition, wesaw the establishment of dedicated sourcesof seed capital targeting Asian start-ups.

Through 2005, those flows continued,though allocators became more discerning,and inflows concentrated in fewer managers.Another trend has been the increase inproprietary and fiduciary allocators, relativeto funds of hedge funds and otherintermediaries. In 2006, many substantialallocators put in place explicit strategies toallow them to understand and allocate to theAsian industry.

Last year and into 2007, many moreallocators established their own researchpresence in the region. The trend toallocating a greater proportion of overallcapital to a smaller number of managerscontinued.

According to Asiahedge, there are 760Asian hedge funds, with aggregate assets ofUSD130bn (GFIA uses Asiahedge,Eurekahedge, and Hedgefund.net data foraggregate information; since databases areunlikely to be comprehensive, one shouldgross up numbers of managers and assetsby between 5 and 10 per cent accordingly).

Allowing for managers that don’t report todatabases, or who report but don’t reportasset sizes, this probably suggests a totalindustry of about 900 Asia-dedicated funds,and perhaps USD200bn of assets. This is asubstantial subset – at least 10 per cent – ofthe global industry.

We estimate that during 2006, at least 100

O V E R V I E W


Asian hedge fundsbecome a more viable

businessBy Peter Douglas

Peter Douglas is the councilmember for Singapore for theAlternative InvestmentManagement Association, amember of the board ofdirectors of the CharteredAlternative Investment AnalystAssociation, and principal ofGFIA, Asia’s oldest hedge fundconsultancy, which researchesAsian and Latin hedge funds onbehalf of professionalinvestors

new Asian hedge funds were launched,continuing a fairly consistent 25 per cent rateof growth in the number of funds over thenine years that we have been following thisuniverse. Looking at the pipeline for 2007, weexpect that this rate of growth will continue,and perhaps slightly accelerate, through thisyear. We expect that by 2008 there will bewell over 1,000 Asian strategies available.From an allocator’s perspective, not onlydoes Asia account for a meaningful part ofthe global industry’s assets, its rate of growthalso makes it a core source of new capacity.

Geographic and strategytrends

All the regional centres are expanding theirmanager base, while growth in the traditionalhome of Asian hedge funds, London, isslowing. There are an increasing number ofcross-border propositions, such as Singaporemanagers dedicated to investing in India orJapan, as the global nature of the industryarbitrages regulatory and operationaldifferences.

We are also seeing many global hedgefunds establishing a physical presence in theregion to take advantage of investmentopportunities. The apparent fall in Japan’simportance is misleading – it’s skewed by thetendency of Japanese managers to establishtheir management company elsewhere.

Comparing our research schedule in 2006,compared with 2003, gives a qualitativeindication of the changing relevantimportance of the various jurisdictions:

We believe that in the near future themajor geographic trends will include London

and the US continuing to lose market shareas the empirical evidence of better returnsfrom indigenous managers becomes clearer.This is likely to be a gradual trend, since thelifestyle attractions of the major westerncentres remain strong.

The ratio of managers between HongKong and Singapore will remain broadlyconstant, though at the margin Singaporeappears to be growing slightly quicker. Weexpect to continue to see managersinvesting in jurisdictions such as India, Japanand Korea that discourage boutique fundmanagement companies to have a localpresence, but the management companyelsewhere. Singapore is currently a keybeneficiary of this trend.

At the margin there will be continuedfragmentation, with managers establishing apresence in Asian centres includingBangkok, Beijing, New Delhi, Kuala Lumpur,Melbourne, Shanghai and Taipei.

Australia may become more importantagain. After an initial wave of managerformation in 2000-02, the availability ofdomestic distribution and capital meant that arelatively small subset of managers was ofinterest to global allocators. As the industrydevelops, we see signs that this may change.

There’s a new wave of manager formationin Japan. Driven substantially by anawareness of the very fundamental changesin corporate Japan and the associated capitalmarkets, and manned largely now byJapanese nationals, the new managersprovide a very interesting, if sometimes notyet polished, opportunity set.

0

20

40

60

80

100

120

140

Decision-making centre: Nov 05 – Sep 06

Source: Eurekahedge; analysis: GFIA

UK

HK/Chin

a US

Austr

alia

Singa

pore

Others

Japa

n

Mala

ysia

India

Korea

Thail

and

Taiw

an

Sep 06

Nov 05

133126

105

84

121

101

86

26

42

6160

7464

5 6 3 2 3 6 3 5 4

121

O V E R V I E W


➧ p6

Number of research visits per year

2003 2006

Delhi 0 1

Hong Kong 8 10

London 3 2

Melbourne 3 1

Mumbai 0 3

New York 1 1

Shanghai 0 2

Singapore* Continuous Continuous

Sydney 4 2

Tokyo 3 4

*GFIA is based in Singapore

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Strategies in Asia

Source Eurekahedge, GFIA

There’s still a predominance of equitylong/short managers, and the majority ofthose are still broadly Jones-modelmanagers, who may do best in sideways orrising markets. Within the catch-all categoryof equity long/short, there are single-country,sector-specific, model-driven, trading andother niche strategies, as well as hugedivergence in manager style, and all shadesof directionality from extremely aggressive tobeta-neutral to net short.

There’s also been growth in CTA-type,fixed income, multi-strategy and relative valuemanagers. ‘Alternative alternative’ strategiespackaged as hedge funds have alsoincreased, including real estate,commodities, factoring, and environmentalthemes. More funds are participating ininstruments such as PIPEs and private CBs,many of which appear to be channelled fromthe investment banks explicitly to the hedgefund community.

We’re seeing an increasing number offormer traders either establishing funds orotherwise becoming involved in the hedgefund industry, which is continuing to reducethe dominance of directional equitylong/short. Also, the emergence of multi-strategy funds reflects the ample variety oftrading opportunities in Asian markets thatcan be better exploited under a multi-strategy mandate (as well as the need toscale the hedge fund industry – a multi-strategy fund can accept more capital).

Looking at the pipeline of managers wetalk to, we believe there’ll be a mini-rebirth of

the absolute return non-benchmarked equitymanager. This was the core of the Asianboutique industry 10 years ago, but anallocator looking for non-benchmarked long-only direction in Asia now has little choiceoutside some very large well-known names.

Intuitively, managers based in the regionshould have better access to informationand, therefore, better performance. Ourresearch, and that of other authorities,indicates that at the aggregate level, this isindisputably the case. However there aresome powerful Asian strategies run fromLondon, which remains the home of thelargest group of managers, New York andother locations outside Asia.

The typical Asian hedge fund is steadilybecoming a much more viable business.Only about 48 per cent of Asian hedge fundshave less than USD50m under management,compared with more than 60 per cent threeyears ago, and this proportion is stabilising.

O V E R V I E W


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Long/ShortEquities 55%

Macro 6%

Multi-strategy15%

Others2%

Relativevalue 5%

Convertiblearbitrage 1%

Arbitrage1%

CTA5%

DistressedDebt 2%

Event driven 3%Fixed income 5%

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www.credit-suisse.com

A common view of Asia’s hedge fundindustry is that it lags a few years behind itscounterparts in the US and Europe. However,there is plenty of evidence that the sector ismaturing rapidly and that Asian hedge fundmanagers are quickly making up the groundon funds elsewhere in the world in terms ofsize, sophistication of strategy and thesolidity of their operational infrastructure.

One of the clearest signs of this rapiddevelopment is in the diversification ofstrategies employed by hedge fundmanagers in Asia. Whereas equity long/shortuntil recently accounted for as much as 80per cent of hedge funds in the region, thatproportion is decreasing with the emergenceof more fixed-income, quantitative and multi-strategy approaches.

This broadening of strategies brings itsown challenges for prime brokers,particularly managers adopting a multi-strategy approach who are seeking strongequity, fixed-income and derivativesplatforms, and for whom the most importantpriority is that their funds are able to tradeand be cross-margined, reported andserviced across asset classes.

At the same time, Asian hedge fundmanagers – like their counterparts elsewherein the world – are developing betterinfrastructure. As managers adopt morevaried strategies, trade more complexinstruments and require increasinglysophisticated trading and analysis tools,institutional investors in particular areinsisting that managers put in place theresources to manage their day-to-dayoperational issues, leaving the investmentspecialists to focus on deliveringperformance.

Some prime brokers have been able toassist this process by providing technologyplatforms to managers, helping to relieve theburden of costs on start-up operations. While

a few allow managers to use their in-housetrading systems, which effectively restricts themanagers to trading with that counterparty,others – like Credit Suisse – offer best ofbreed third-party open architecture systems,from front-end trading execution to riskmanagement and real-time P&L, to fundmanager clients on advantageous terms.

Over the past few years Asia has grownin importance for European and USmanagers as returns have outperformedother regions and their Asia book has grownas a proportion of their portfolio. Inresponse, many international funds haveopened regional offices from which theyconduct both research and trading.

At the same time, however, local start-upfunds are demonstrably growing in size ofassets and number of funds; they are bothattracting more assets internationally andbecoming more diversified as localmanagers branch out from their initialspecialisation into the multi-strategy arena.

This means they are also moving awayfrom the single prime broker model tomultiple prime brokerage. They are lookingfor targeted capital introduction, high-touchclient service, more diversified and stablestock loan capability, and a one-stop shop forderivative coverage, and where their originalprime broker is less strong in certain marketsthey are forging new relationships withservice providers that enjoy greater access.

The development of the hedge fundindustry in Asia is clearly moving faster thanit did elsewhere because of experience inother regions. Just as second-generationmanagers who traded Asia from the US,Europe or within Asia have sought-after skillsand established track records, global serviceproviders with international knowledge andexperience combined with strong localmarket coverage can add value to bothexisting and new managers. ■

C R E D I T S U I S S E


Asian market showsits maturity

By Kevin Meehan

Kevin Meehan is head of Asia-Pacific prime servicescoverage with Credit Suisse inHong Kong

Over the four years to mid-2006, theproportion of Asian hedge funds managingmore than USD100m actually decreasedslightly, from 19 per cent to 14 per cent(although as usual take the absolute valueswith a large pinch of salt), while the numberin the USD10m-USD50m band increasedfrom 32 per cent to 46 per cent. The industryis beginning to concentrate.

Nearly half all Asian hedge funds havebeen running for more than three years, andalmost 200 for more than five years; thesupply of ‘graduates’ carrying with them atrack record and reputation from existinghedge fund firms is growing. At least a thirdof new managers we see are now driven bysecond or third generation professionals.

Stimulating growth is increasing activity

from the prime broking industry in Asia, withmost of the big names now competingaggressively to encourage new managers,sometimes with client service staff in morethan one Asian location, and the availabilityof many sources of seed or incubationcapital, often from global investors.

The capacity picture of Asia is beginningto resemble that of the rest of the world, withpopular managers soft-closing within 12months, and a good track record virtuallyensuring a close within 24 to 36 months.

This is exacerbated by the smaller volumeof underlying capital markets in Asia thatconstrains managers to smaller asset sizes.Only 9 per cent of Asian funds have morethan USD500m in assets, and although thisis changing (in 2004, only 5 per cent ofAsian funds had more than USD500m ofassets), to our knowledge fewer than half ofthose are accepting new capital.

A typical equity long/short manager inJapan would have capacity of perhapsUSD500m, and in Asia ex-Japan maybeUSD250m. Our research suggests that theperformance ‘sweet spot’ for an Asianlong/short fund is around USD300m.

Liquidity has been increasing, butunderlying capacity is rising more slowly dueto constraints on shorting availability, theneed to apply leverage, and an increasednumber of market participants. There aremore than 100 Japan long/short funds thathave assets of less than USD500m; in Asiaex-Japan, 37 long/short equity funds haveless than USD200m.

We estimate that currently the bettermanagers in the region still have anaggregate capacity somewhere in excess ofUSD15bn – and this has not, despite capitalinflows, changed much in the last 24months.

The ABN Amro Eurekahedge Index (as itthen was) returned a creditable 4.71 per centin 2002, but then a much more headline-worthy 26.05 per cent in 2003. The equivalentindex returned 9.86 per cent in 2004, and7.96 per cent in 2005. In 2006, the index hada return of 12.9 per cent including Japan, anda powerful 25.2 per cent excluding Japan. Webelieve that the capital markets andunderlying economies of the region willcontinue to develop and create attractivereturns for Asian hedge funds. ■

O V E R V I E W


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CHICAGO

Chicago Administration & Corporate Services LLC.

372 West Ontario, Suite 1N,Chicago, IL 60610.

Tel: (+1) 312 280 0330

DUBLIN

Custom House Administration & Corporate Services Ltd.

25 Eden Quay,Dublin 1, Ireland.

Tel: +(353) 1 878 0807

SINGAPORE

Singapore Administration & Corporate Services Pte Ltd.

180B Bencoolen Street,#09-03 The Bencoolen, Singapore 189648.

Tel: (+65) 6303 8393

Custom House Offers 24/7 Service

Custom House Administration & Corporate Services Limited is authorised by the Irish Financial Regulator under Section 10 of the Investment Intermediaries Act 1995.

Custom House Administration & Corporate Services Limited, which offers its clientsa full hedge fund administration service through Dublin and Chicago,

now offers a full “round the world” and “round the clock” servicewith the addition of a Singapore office in January 2007.

For more information on Custom House, the only hedge fund administrator awarded a Moodys Management Quality Rating, please review our website

(www.customhousegroup.com)

or contact Dermot Butler ([email protected])or David Blair ([email protected]).

The decision by Custom HouseAdministration to establish a presence inSingapore is far from a spur-of-the momentaction but part of an expansion plan wehave been refining for several years. Ourgame plan always envisaged first opening anoffice in Chicago because we saw thepotential in the North American market,particularly as a large number of US fundsare still self-administered, and we believedthat investor pressure would prompt funds toconclude that they should seek anindependent administration provider.

When we opened in Chicago rather thanNew York, a lot of people wondered why.One of the reasons was that it was an hournearer Singapore, which we had identifiedtwo or three years earlier as an area withgreat potential. Since then much of thatpotential has been fulfilled as Singapore hasbegun growing rapidly as a centre for hedgefunds, reflecting the growth of the industrythroughout East and South-East Asia as awhole.

For the financial services industry, theregion includes Australia, and Sydney is oneof three possible choices for a firm lookingto establish a presence there, along withSingapore and Hong Kong. Sydney hasmany attractions and is in the right timezone, but it is geographically isolated fromthe rest of the region and is a long way fromother countries in South-East Asia, let alonefor travelling to Dublin and the US.

Nor is Sydney particularly cheap, a factorthat also comes into play with Hong Kong,where costs such as office space areextremely high. And what Singapore alsooffers is not just a well-educated workforcebut a procedural and disciplined mentality,well suited to an administrative businesswhere common sense and dedication are

more important attributes than moreentrepreneurial qualities. Finally, it offers abackdrop of calm and stability in a regionthat has known its share of political andeconomic turbulence.

But the main reason we have moved intoSingapore is that we think there’s a bigmarket to capture. In particular, there isstrong potential to win business from fundsthat bigger administrators consider too smallto be worth taking. That could be a fund withassets of USD100m, which not so long agowas considered a big fund; Custom House iscertainly capable of making a living fromfunds of that size.

The establishment of the Singapore officealso effectively gives Custom House thesame 24-hour capability offered by thelargest global hedge fund administrationgroups. This means functions can be sharedbetween jurisdictions to complete work in atimely and efficient manner. For example, weadminister a number of daily dealing fundsmanaged in North America. In most caseswe can carry out the trade reconciliationduring Singapore’s working day, get theNAVs calculated in Dublin, and pass thecompleted work back to North Americabefore they’re awake.

Our offices are not structured as a silosystem or independent, stand-aloneoperations but as a totally integrated system.All our activity operates off the same serversin Dublin, allowing anyone with the authorityin Chicago, Singapore or Dublin to monitorthe work being carried out in the otheroffices. Even the telephone system passescalls on when each office closes in order toprovide a 24-hour response. Singapore hasgiven Custom House a global footprint thatallows us to service customers around theclock and around the world. ■

C U S T O M H O U S E


Singapore completes a global footprint

By Dermot Butler

Dermot Butler is chairman ofCustom House Administration

As fast as hedge funds spring up tocapitalise on the investment opportunitiesavailable in Asia’s dynamic and fast-growingmarkets, they are being shadowed byproviders of services to the industry that seein the region a potential for growth that isnot necessarily available in the more maturemarkets of Europe and North America.

Singapore and Hong Kong are the mainbeneficiaries as prime brokers, fundsadministrators, capital introduction specialistsand others establish a presence on theground to meet demand for their servicesthat is being fuelled notably by the appetitefor exposure to Asia of Western institutionalinvestors.

However, one should not discount theimportance either of the developing wealthwithin Asia itself, which is set to createdemand for alternative products in the future,even if at present soaring stock marketsmake it hard to persuade some investors ofthe diversification benefits that hedge fundinvestment can bring particularly in a lesspropitious economic climate.

“The rich in South-East Asia are just asrich as they are anywhere else,” saysDermot Butler, chairman of Dublin-basedCustom House Administration, which set upan operation in Singapore earlier this year.[Hedge fund investment] may take a littletime to get going, because while the markets

A D M I N I S T R AT I O N


Opportunity knocks forhedge fund services

By Simon Gray

➧ p15

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The hedge fund industry in Asia todayresembles that in Europe a couple of yearsago. For example, the average size of a newhedge fund launch is still relatively small atless than USD100m, although this representsan increase over the past couple of years.However, the region is starting to see one ortwo very large fund launches each year, andtheir number is certain to grow as theindustry continues to develop.

Funds starting up with a relatively smalllevel of assets under management have lessavailable to spend on getting their operationsup and running and are likely to have asmaller in-house technical infrastructure.However, Asian managers remain consciousof the importance of having proper portfoliomanagement systems – especially as to alarge extent their investor base may be notnecessarily Asian but Western.

With the benefit of several more years ofexperience and industry development,Western investors have a good idea of whatthey need to see in hedge fund managers toensure their peace of mind, and a soundtechnology base is one of those things.Because of their more limited resources, theAsian hedge fund managers who are clientsof Beauchamp Hedge Fund Solutions tend tobe interested in our ASP product, becausethey don’t want to have to manage anyhardware infrastructure in-house, andbecause it’s an economical choice for astart-up business.

One of the unique characteristics of theAsian hedge fund industry is that for manymanagers trading takes place in a differentlocation to the generation of investmentideas. A substantial number of Japanesefunds carry out trading through offices inSingapore, because in order to carry outtrading onshore in Japan funds have to beregistered with the financial authorities in

Japan, which is prohibitively expensive formost hedge fund start-ups. With interest inJapanese hedge funds growing among USand European investors, this is helping toboost significantly the number of fund start-ups in Singapore.

The number of Japanese funds usingSingapore for trading is also encouraginganother trend characteristic of the Asianhedge fund industry, the use of so-calledhedge fund hotels or incubators. Many fundswill seek to avoid the extra expense ofsetting up their own office in Singapore bydoing all their trading through a hedge fundhotel that manages all the technology andinfrastructure.

Some will not only host the fund andprovide an execution platform but will helpraise capital and even give the fund moneyto run, perhaps in exchange for a stake inthe fund manager when it grows larger andmoves out to set up its own operationalinfrastructure.

Whereas in the past most Japanese hedgefunds were set up by Western managers, thepast year has seen the emergence of localmanagers from large institutions to set up ontheir own. Even though this runs against thegrain of Japanese culture, the economics arecompelling for talented managers whosecompensation within institutions is largelydetermined by seniority.

Alongside the emerging Asian hedge fundtalent are large hedge fund managers fromthe US and Europe and global financialinstitutions that are opening offices in theregion. These firms have differentinfrastructure needs from start-ups becausethey need to be able to run a centralisedsystem that facilitates real-timecommunication and exchange of data withtheir headquarters in New York or Londonand any offices around the world. ■

L I N E D ATA S E R V I C E S


Emerging managerslook to outsourcing

By Stuart Farr

Stuart Farr is chief executiveof Beauchamp Hedge FundSolutions at Linedata Services

have been booming, nobody wants to investin hedge funds when they can make a lot ofmoney going long on the equity markets. Butthat’s cyclical and will change. I think themarket is going to grow very rapidly.”

Christophe Lalo, the Hong Kong-basedregional head of marketing for Asia-Pacifichedge funds at Société Générale AssetManagement Alternative Investments, agreesthat while the local market climate might notcurrently be particularly favourable to hedgefunds, there are opportunities for providersthat structure their offerings around thepreference of Asian investors for investmentin their own region.

“Three years ago people were onlylooking for capital-protected products, andnow they are looking for equity products,”he says. “However, the inevitable stockmarket consolidation will remind investorsthat markets go down as well as up.Otherwise it’s really a question of bringingthe right product to the right investors.That’s why we offer a Japanese equityproduct and we launched an Asia-focusedmulti-strategy fund of hedge funds at thebeginning of this year.”

SGAM is also offering investors a long-only umbrella fund that gives access to threelong-only equity strategies managed byRenaissance Technologies, CaxtonAssociates and Highbridge. According to thefirm, the funds involved financial engineeringto adapt the characteristics of the managers’hedge funds to the format of a Ucits III-compliant Sicav.

Says Lalo: “We strongly believe that thekey to success lies in the convergencebetween hedge funds and mutual funds. It isnot easy to access hedge funds because ofliquidity and minimum investment size. Theminimum investment in Renaissance isUSD20m, but through this partnership wehave turned this into a Ucits III Sicav with aminimum investment of only USD1,000 andweekly liquidity.”

SGAM AI has been established in Tokyo(where it manages money as well asmarketing products) for five years, but Lalomoved from Paris to set up the Hong Kongoffice at the beginning of last year. He saysthe firm is building up its Asian sales teamwith dedicated staff for all the mainmarkets such as Taiwan, Korea, Singapore

and Hong Kong, and targeting institutionsas well as private banks and otherintermediaries.

“If you take India and China alone, theyrepresent nearly 50 per cent of the world’spopulation,” Lalo says. “It might take yearsbefore you can sell openly a hedge fund inIndia or China, but as the market opens upover the next few years there will be hugeopportunities both on the management andinvestment side.”

He adds: “A number of very talentedhedge fund managers have establishedthemselves in Asia, which is set to become



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© 2007 PerTrac Financial Solutions. All rights reserved.

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With its core PerTrac Analytical Platformproduct, PerTrac Financial Solutions is by farthe largest player in the market for providingasset allocation and investment analysissoftware to the alternative investment industry,with customers in 46 countries around theworld and nearly 100 clients in Asia.

After Insight Venture Partners and SalmonRiver Partners invested in PerTrac in July2005, we examined what we needed to do togrow the business. First, there was naturalgrowth in our underlying market with thenumber of hedge funds, the number ofinvestors in hedge funds, and the amount ofallocations to alternative investments allgrowing. Tools to help people analyse andcommunicate hedge fund performance werebecoming more and more important.

However, no market stays still, and ourclients were becoming bigger and moresophisticated, more global in many ways,and their needs were evolving. Our firstcommitment was to ensure that thecapabilities of our core analytical productremained in step with those needs.

As hedge funds have proliferated, so hasthe number of hedge fund databases. Toenable clients to use multiple databases fromdifferent data vendors more effectively, weembarked on a major effort to cross-referenceall the databases so that clients using ourprogramme could search them simultaneouslyand automatically. This enables them toproduce hedge fund universes withoutduplicate listings, which is crucial whencreating peer groups or benchmarks, orseeking managers for potential investment.

This feature, unveiled in September lastyear, is just one of a number of changes tothe product that are developed andintroduced on an ongoing basis, with twomajor releases scheduled every year. Otherrefinements to the programme that reflectdevelopments in the marketplace include

supporting weekly and daily data, addingnew databases, supporting factor and impactanalysis, and adding more quantitative tools.

The second part of the strategy hasfocused on the workflow of our clients bybuilding an integrated suite of products to tietogether many of their needs and allow themto work seamlessly with information fromone programme to another, in the same waythat Microsoft Office offers an integrated setof workplace IT applications.

The acquisition of Whittaker Garnier withits CMS product just over a year agotargeted the need for communicationsmanagement in its broadest sense, includingcommunications from hedge funds andfunds of funds to their investors andbetween fund of funds and the managersthey are invested in, document management,contact management, relationshipmanagement and e-mail logging.

The integration of our products makes themmore attractive to an increasing number ofclients who are expanding into the region asthey develop a global footprint. We now havean extensive roster of firms including capitalintroduction groups, prime brokers, funds ofhedge funds and large hedge funds that ourusing PerTrac products in Asia as well as attheir headquarters in London or New York.

PerTrac’s office in Hong Kong is headedby Phil Cook, who has been working sincehis appointment last year to buildrelationships with our Asian clients andprospects. Joined by Curtis Schmidt, a long-time PerTrac staffer who specialises intraining and support, the local team iscommitted to strengthening and deepeningclient relationships as well as enabling us torespond more effectively to market needs.And in a region where long-termrelationships are prized, it demonstrates thefirm’s strategic commitment to its clients andto the Asian hedge fund market. ■

P E R T R A C F I N A N C I A L S O L U T I O N S


Developing a long-termpresence in Asia

By Gerry Mintz

Gerry Mintz is president andchief executive of PerTracFinancial Solutions

the main growth area for the global hedgefund industry over the next five to 10 years.At present Asia may still be small in termsof numbers compared with the US andEurope, which are much more mature, butthis region is now experiencing exponentialgrowth.”

PerTrac Financial Solutions, the leadingprovider of asset allocation and investmentanalysis software to the alternativeinvestment industry, has had clients in Asiafor many years, both among fund of hedgefunds managers and investors such as largefinancial institutions, family offices,foundations and endowments, and recentlyopened an office in Hong Kong to add to apartnership arrangement that provides clientsupport in Japan.

Says president and chief executive GerryMintz: “We’ve steadily grown our business inJapan, where we effectively we have twopeople on the ground to offer support in the

local language. Elsewhere in Asia we haveseen increasingly strong growth in thebusiness from investment-side clients notonly in the main markets of Hong Kong,Singapore and Australia but elsewhere. Wehave users ranging from small family officesto state pension schemes such as that ofSingapore.”

Mintz says the firm is seeing synergybenefits from its acquisition just over a yearago of Whittaker Garnier, provider of amarket-leading customer relationshipmanagement application. He says: “A lot ofthings prompted us to open an office in thenon-Japanese part of Asia. One was thenumber of hedge funds springing up, whichwould need tools to present theirperformance to investors and benchmarkthemselves against their peers. There was anatural market there for PerTrac, but also forthe Whittaker Garnier CMS product, becausethey’re raising money from investors.



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“Capital introduction groups and primebrokers that use the product globally arebuilding up their Asian presence and wouldbenefit from having local support. We alsohave clients from the Asian region who areusing both PerTrac Analytical and CMS incombination to improve the productivity ofwhat is often a relatively small branch officeand connect them with what their colleaguesare doing around the world.”

He can see further expansion in theregion in the future as the businessdevelops. “It will take years to develop themarket, and we’re in it for the long term,”Mintz says. “From a developmentperspective we will look at things like whenit might be appropriate to have an office inSydney, for example. What will the marketlook like in countries such as mainlandChina? Will we need to have people on theground there, or will it be a market wherehedge funds just send people in to doresearch?”

Kevin Meehan, head of Asia-Pacific primeservices coverage with Credit Suisse in HongKong, notes that it is a mistake to view Asiaas a single market on the lines of theEuropean Economic Area. “The big thing inAsia which is different from the US andEurope is that you have to interact with 14 ormore distinct markets, each with their ownregulatory issues,” he says.

Meehan says that diversification is one ofthe key characteristics of the hedge fundindustry in Asia today. “In 2006, the fastest-growing strategy in Asia was multi-strategy,”he says. “We are also seeing somemanagers looking to have a proportion oftheir portfolio in less liquid assets, through aside-pocket in a convergence of hedge fundsand private equity. Many are looking to theprivate markets, pre-IPO, and are looking toinvest in positions earlier.

“Managers are also looking to diversifyinto other markets, such as Vietnam andPakistan, two markets that we can nowprovide that not all market participants areable to. The appetite is not only fordifferent types of asset class but also tohave derivative exposure to broadermarkets.”

Derivatives are particularly important inAsia because of the difficulty in accessingcertain markets, Meehan says. “The prime



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Hong Kong may remain the main Asian centre for hedge fundsoutside Japan, but its perennial rival Singapore is steadily gainingground, thanks in part to a relaxed regulatory regime for managersthat belies the city-state’s reputation for excessive state controland indeed has sparked a certain degree of concern amonginvestors worried about lack of supervision.

According to Singapore-based research firm Eurekahedge,Hong Kong-based managers ran 15 per cent of hedge funds thatinvest in Asia at the end of last year, compared with 10 per centfor Singapore, but it was Singapore that dominated new launcheswith 24 start-ups compared with six in Hong Kong.

Singapore has benefited from regulatory provisions under whichmanagers whose funds have no more than 30 qualified investorsare exempt from the requirement to obtain a Capital MarketsServices licence. This enables hedge funds to be set up inSingapore in as little as a week, whereas obtaining a licence tooperate as a hedge fund manager in Hong Kong can take as longas four months.

On April 3, Singapore had 347 exempt fund managers,according to the financial industry regulator, the MonetaryAuthority of Singapore. However, a number of investors includingfunds of hedge funds and US pension schemes are reported tohave asked the Singapore government to tighten the rules for fundmanagers, concerned that the lack of regulation makes thejurisdiction vulnerable to episodes like the 2005 closure of theAman Capital Global Fund following losses on derivatives trading.

Industry participants say Singapore has been the primebeneficiary of regulations in other Asian markets that discouragehedge fund managers from setting up their operations in thecountry where their investment is focused. According to PeterDouglas, principal of Singapore-based consultancy firm GFIA,managers investing in jurisdictions such as India, Japan and Koreamay have a local presence but their management company iselsewhere, usually Singapore.

“Singapore has been very aggressive about making it very easyto get authorised there,” says Stuart Farr of Beauchamp HedgeFund Solutions. “It certainly doesn’t hurt that you can getauthorised effectively overnight, and while it’s not that hard toregister in Hong Kong either, it’s a marginal benefit. In addition, thetax rate is lower in Singapore, and there’s more availability ofoffice space, although rents have been going up because there’sso much demand.

“Historically labour has been cheaper in Singapore, which has awell-educated, relatively experienced financial workforce that is ona par with that of Hong Kong. There are also travel costs – flyingthrough Singapore is often cheaper than Hong Kong. For a fundmanager the chances of company visits exclusively taking place inSingapore or Hong Kong are pretty slim, so you will have a lot oftravel expenses. And there are also lifestyle benefits. Hong

Start-ups help Singapore gainin rivalry with Hong Kong

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brokers that have done well are those thathave strong derivative platforms. One of thethings we’re seeking to do on the derivativesside is to create a one-stop derivatives shopwithin prime services. That will enable us notonly to put together vanilla derivativeproducts but create and tailor derivatives togive clients access to particular productseither through an individual stock or througha sector type of swap, index, future oroption.”

A decade ago, a number of Asiancountries took the opportunity to blamehedge funds for the region’s economic andfinancial crisis, but today, Meehan believes,there is a more mature and balanced view ofthe role hedge funds play, particularly amongthe region’s supervisory authorities.

“Regulators are probably more likely thesedays to be in contact with other regulators,not only within the region but those whohave experience with hedge funds in otherregions, such as Europe and the US,” hesays. “I suspect there is much more opendialogue between the regulators in Asia andthose in jurisdictions that freely permit hedgefunds to trade, and are able to share thoseexperiences with supervisors that currentlydo not permit them or are reviewing theirsituation.”

Stuart Farr, chief executive ofBeauchamp Hedge Fund Solutions, says:“One trend we’ve noticed recently is thatAsian managers are ramping up to createabsolute return institutions as opposed tojust hedge funds. There’s a big base oflong-only investment, but the hedge fundmarket is taking off and as a result, theidea of mixing these two types of asset isnot considered ridiculous, whereas it’staken a few years for US and UK pensionfund investors, for example, to get theirheads around alpha, the concept ofabsolute returns, and whether hedge fundsare really risky.”

He adds: “Electronic trading is also takingoff in Asia, as everywhere, but in the past sixmonths we’ve seen a marked uptick ininterest in electronic trading, and the conceptof straight-through processing is starting totake off. They don’t need to go through thewhole laborious process that everyone elsehas taken to get there – there’s no need toreinvent the wheel.” ■



Kong is a more vibrant place in which to live, but if youhave a family, Singapore is a bit more liveable.”

While many hedge fund service providers have remained faithfulto Hong Kong as the traditional centre for hedge funds outsideJapan, Singapore is starting to gain traction, insiders say, as ahedge fund administration centre. Earlier this year Custom HouseAdministration, a niche Dublin provider that also has a presence inChicago to serve the US market, opened its Singapore office.

Custom House chairman Dermot Butler notes that foradministrators at least, the cost equation is tilted firmly towardSingapore. “Costs in Hong Kong are horrendous,” he says. “Theyare not so horrendous in Singapore, which is currently the leastexpensive of our three locations, followed by Chicago and thenDublin, which is now very expensive to operate in.” However, henotes that despite the recent surge in hedge fund start-ups in theLion City, Hong Kong retains the advantage of its proximity toChina.

PerTrac Financial Solutions opted for Hong Kong for its firstoffice in Asia, says chief executive Gerry Mintz, because of theestablished weight of existing and potential customers for theasset allocation and investment analysis software provider,although he does not rule out a presence in Singapore (orSydney) in the future if and when the firm’s business warrants it.

“It was logical to put our people on the ground in Hong Kong tostart with, because we felt that it currently offered more on theinvestor side and maybe a bit more critical mass among primebrokers, capital introduction groups and others,” he says. “Andobviously it has a meaningful number of new hedge funds,although Singapore is getting pretty important too.”

Christophe Lalo, regional head of marketing for Asia-Pacifichedge funds with Société Générale Asset ManagementAlternative Investments in Hong Kong, believes the rivalrybetween the two jurisdictions is overblown. “Each centre has itsown benefits, and I wouldn’t say one is better than the other,” heargues. “It’s just like Luxembourg and Dublin, or Cayman andJersey. There’s no real difference between Tokyo, Sydney, HongKong and Singapore. There is room in the market for all theAsian centres.”

Kevin Meehan, head of Asia-Pacific prime services coveragewith Credit Suisse in Hong Kong, adds: “There’s a lot ofdiscussion about Hong Kong versus Singapore, but the fourjurisdictions where hedge funds tend to be based in Asia shouldreally be neutral from the perspective of a prime broker, whichshould be looking to service clients in each of those locations.”

Meehan says Credit Suisse decided on Singapore as the bestoption to place its operational infrastructure in the region, in orderto meet the challenge of “providing a high-touch service to clientswherever they are based. We have something like 50 operationspeople and 40 IT people serving not only Asia but our Europeanplatform. We have client-facing staff in each of Hong Kong, Tokyoand Australia, while our operational team in Singapore is alsoorganised on client rather than functional lines.” ■

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