Given the particularly strong headwinds faced by hedge funds in Hong Kong and Singapore recently, their managers may now be considering a move back into corporate life. The only problem is that things aren’t much better there.
During our conversations last week with Hong Kong hedge fund industry participants, it became apparent that the industry may benefit from an unlikely source: the general melt-down in the financial services sector. Just as laid-off financial services workers might decide to launch their own hedge fund in response to a dearth of job opportunities – so too might many hedge fund managers stay in the game a little longer. With job opportunities so few and far between, we are told that many small hedge fund managers in Hong Kong might just stick it out – even if they are (temporarily, it is hoped) running at a a loss.
The result is that for now at least, this has staved off a possible hedge fund brain drain.
Cities duel as ship takes on water
After an interesting week in Hong Kong, we have now made our way down to its arch rival in the regional battle for asset management supremacy: Singapore.
Although it is thought to have no more than an eighth of the assets under management of Hong Kong (in all asset classes), Singapore has been wooing asset managers aggressively in recent years – particularly hedge funds.
Last week, the city-state stepped up its game by creating new tax incentives for asset managers. As Asian Investor reports:
“Fund management is an industry that Singapore, Hong Kong, and even China are keen to develop to improve their standing as regional financial centres. Singapore has just scored another point in advancing this cause in the form of a new tax incentive.
“The Singapore government, in line with initiatives included in its 2009 budget, has announced a new tax incentive for certain investment funds managed from the city-state that have no restrictions on the residency status of fund vehicles or investors.”
Too little, too late?
Singapore clearly thinks it’s on to something. But will tax incentives be enough to convince Hong Kong managers to pick up and move? Will a potential tax savings even be enough to cover just the costs of relocating when these funds are already losing money on operations?
The head of Cerulli Associates’ Singapore office doesn’t think so. He tells Asian Investor:
“The enhancement will allow more funds to benefit from the tax incentive, but in the current environment I suspect it’s going to take more than that to boost the fund management industry…The main issues for funds in Singapore and elsewhere are asset retention and asset gathering. In the near term it looks as though the industry will continue to see net outflows and a tax benefit will not be sufficient to address the problems.”
Move to single-manager funds adding insult to injury
Many of Asia’s hedge fund assets come from funds of funds. That was great news when assets flooded the industry via these vehicles over the past 5 years. But the tide has recently turned – explaining why so many Asian hedge funds risk being washed out to sea. IPE.com reported last week that Watson Wyatt saw a significant shift away from FoFs and toward single-manager searches last year. According to IPE.com:
“Approximately 30% more searches for direct hedge funds were done in 2008 than in the previous year while the number of fund-of-hedge-fund mandates fell as a proportion of hedge fund calls, from 44% to 35%.
“Single-manager hedge funds now account for approximately two-thirds of searches with multi-strategy and long-short equity funds being the most popular choice.”
Smaller funds lack marketing resources and therefore tend to rely on funds of funds assets (which are relatively easy to raise). This problem is only compounded when you’re running a smaller fund that is 8 to 16 times zones away from many large end investors.
Small funds too busy to register: Hedge Funds Standards Board
Life is tough for small managers in other regions too. The UK’s small hedge funds likely face the same calculation: fold-up shop and begin a potentially fruitless search for a new job, or slog it out in hopes that – come recovery time – a continuous track record will provide a useful marketing advantage.
This hedge fund purgatory is now being blamed for the lack of adoption of certain self-regulations. As we have reported, the UK’s self-regulatory guideline-setting group the Hedge Fund Standard Board had trouble motivating many of the country’s hedge funds to sign-on to certain guidelines last year. Now the organization has come out with a theory as to why this might be: survival instinct. Apparently, smaller hedge funds (the bulk of the industry’s participants by number) are too focused on staying afloat.
HFSB trustee and former AIMA Chairman Christopher Fawcett told Thomson last week:
“Clearly there are a number of smaller hedge funds which probably won’t be around in twelve months time, and, therefore, their main focus will be survival and reducing costs…”
What matters, says Fawcett, is the percentage of AUM represented by the new guidelines, not the percentage of companies themselves.