Size acts as barrier to growth of Asian hedge funds

By Nishant Kumar and Kevin Lim
HONG KONG/SINGAPORE | Thu Dec 30, 2010 3:21am EST
HONG KONG/SINGAPORE (Reuters) - Two smaller Asian hedge funds that
have bet on Thai and Southeast Asian stocks have made a killing this
year, racking up more than 80 percent gains and ranking among the
world's 100 top-performing hedge funds.

The Thai Focused Equity (Class A) and Albizia ASEAN Opportunities
funds, however, have received only a trickle of fresh inflows
compared to the cash that global investors have been pouring into
their larger rivals in Asia.

The fight for assets is likely to extend to 2011 as investors
continue to shun smaller funds. Rising compliance costs will also
crimp their ability to turn a profit and make it tougher for
start-ups in Singapore and Hong Kong to grow.

The reluctance of institutional investors to park assets in smaller
players could stymie the development of the $125 billion Asian hedge
fund industry since small hedge funds have often been the source of
innovative ideas in the West.

"It's been very difficult to raise money," said Jeep Chatikavanij,
chief investment officer of Hunters Investments, whose $70 million
Ton Poh Thailand Fund was up nearly 70 percent up to November in
2010, putting it in the third spot among the 11 Asia-themed funds on
Lipper world's top-100 hedge funds.

"Largely big hedge funds have been attracting money."
Reasons cited by institutional investors for not allocating money to
smaller funds include uncertainty as to whether managers can
replicate the strong gains they showed in the past as well as
concerns about the quality of risk management.

Even if a small fund has performed well, there are doubts if the
strategy can continue to work following a surge in assets.
"Clients typically want a $100 million minimum," said Christophe
Belhomme, chief investment officer of FundQuest, a BNP Paribas unit
that manages fund-of-funds.

Asian funds are much smaller than their Western counterparts.
About two-thirds of the region's managers have $50 million or less in
assets, according to Singapore fund-tracker Eurekahedge, keeping them
out of the radar of the influential institutional investors who
contribute the most to the flows into the industry.

Over the years, investors have preferred bigger players in Asia, with
the trend intensifying in 2008 when a large number of small funds
were forced to close due to losses and redemptions.

However, while the money has started coming in and global players
show interest in setting up operations in Hong Kong or Singapore, the
regulatory environment and higher operational standards demanded by
institutional investors continue to pile costs on the region's mostly
smaller and younger funds.

Under proposed rules in both the United States and Europe, hedge
funds in Hong Kong and Singapore could soon be forced to adhere to
Western regulations as well as rules set by domestic authorities,
hurting smaller Asian funds in particular by increasing both the cost
and complexity of their operations.
Source: Reuters.Com