Large Investors Find Asian Hedge-Fund Options Limited

Large Investors Find Asian Hedge-Fund Options Limited

Asian Hedge Funds Are Performing Well, but Large Ones Are in Short Supply

MIA LAMAR And CHAO DENG

Updated Nov. 19, 2013 9:06 p.m. ET

Large overseas investors can’t get enough of big-name Asian hedge funds. Too bad there aren’t more of them. Deep-pocketed pension and endowment funds—many from the U.S.—are coming to Asia in droves, ready to put cash in the region’s hedge funds as the industry rounds out what is shaping up to be a second straight year of outperforming peers in the U.S. and Europe.“There’s a constant flow of investors regardless of conferences the past few months,” said Martin Visairas, Citigroup Inc. C +0.75% ‘s head of Asia-Pacific capital introduction, noting this is a contrast to years past when most investors would time fund visits around other business trips to the region. Many are arriving prepared to do due diligence and map out investments rather than simply take meetings, he said.

One of those coming to the region with more frequency is Wayne Kozun, who manages the global hedge-fund portfolio of the Ontario Teachers’ Pension Plan, with $129.5 billion in assets at the end of 2012. The pension fund opened its first Asian office in Hong Kong this fall and has recently been talking to some of the city’s hedge-fund managers. OTPP hasn’t traditionally been a big investor in Asia-based hedge funds, instead leaning toward private-equity investments, Mr. Kozun said.

Yet large investors, which typically want to invest at least $100 million, are finding there is a short list of top-tier hedge funds in Asia that can handle both the size of their investments and merit a lengthy due-diligence process.

Max Gottschalk, Asia business head for Swiss fund Gottex Asset Management, estimates there are about three dozen hedge funds in Asia with more than $1 billion of investor assets, compared with around 200 such North American funds counted by industry tracker Eurekahedge. Close to 40%, he estimates, aren’t currently taking new investor money. Eurekahedge puts the number of $1 billion-plus Asian hedge funds at 25.

Some of the region’s best-known funds are among those not currently taking new investor money, including the Myriad Opportunities Master Fund, led by former Highbridge Capital Management LLC Asia head Carl Huttenlocher, according to a person familiar with the fund.

Asian hedge funds are “increasingly more careful on their size,” said Masa Yanagisawa, head of Deutsche Bank‘s DBK.XE -0.81% capital introduction team for Asia. Lower liquidity in Asian markets is one reason, as well as a fund’s own determination that the amount of money it is managing can be successfully put to work.

Hedge funds focused on Asian markets excluding Japan beat their global counterparts last year for the first time since 2009, according to Eurekahedge, and are on track to do it againthis year with an 8.7% gain as of October. Funds focused on Japan are doing even better, with a 23% return. By comparison, North American hedge funds are up 7.4% while European funds are up 6.7%.

The limited options for large investors means cash is cascading to smaller funds with assets around or above $500 million, including some that are reopening to certain investors, said Citi’s Mr. Visairas.

Simplex Asset Management in Tokyo is one beneficiary of increased interest in Asian hedge funds, particularly from investors wanting exposure to Japan’s booming stock market. Rei Aiba, a vice president at Simplex, said it has raised more than $100 million for its primarily small and midcap Japanese equity strategy this year, the most in a single year since the firm started marketing the strategy to overseas investors in 2005. It is still taking new investor money, he said.

“It’s a totally different world from just a year ago,” Mr. Aiba said. “More and more people are interested in the opportunity here.”

For funds like Simplex, the money doesn’t look to be running out anytime soon. Tim Wannenmacher, co-head of global financing services for Asia-Pacific at UBS,UBSN.VX -1.47% estimates there is another $10 billion that could be invested in Asia-based hedge funds before competition truly starts to heat up. “You are competing more for liquidity in the region than investor money,” Mr. Wannenmacher said.