Despite the overall peaceful environment in Asia, there are still a number of hurdles that hedge funds there must overcome to operate successfully. One must bear in mind that Asian markets are younger than and not as developed as Western ones. For instance, short-selling is banned or restricted in some Asian markets. And there is something of a shortage of highly experienced fund managers to run the many new Asian funds fueled by money inflows.
These hurdles have perhaps slowed down Asian fund investment, but growth there is still rapid. Corporate applications to start hedge funds in Asia are accelerating. The number of Hong Kong hedge fund managers is approaching 400.
It is the smaller hedge funds that have the greatest obstacles. Raising capital can be difficult, especially for funds of funds, which are being bypassed by many large pension funds. Thanks, Bernie Madoff, for giving funds of funds a bad reputation! Of course, had the FOFs been doing due diligence, they never would have become involved with Madoff in the first place, so the damage was to a large extent self-inflicted. Suffering FOFs hurt small hedge funds, because the latter are the favorite investments of the former. As time passes, however, risk-loving investors such as rich individuals and family offices will come back to the Asian markets, and small hedge funds will benefit from this renewed interest.
Due diligence remains a problem. For instance, a large pension fund will not want to invest a lot of money in a small hedge fund, because it would essentially become partners by swamping other, smaller investments. Smaller investors may find Asian hedge funds too exotic for their tastes.
Oftentimes, investors like to visit the headquarters of their hedge fund investments. But traveling to Asia is a time-consuming and costly undertaking, so it makes sense for these investors to use fund managers with a proven track record. Small, new hedge funds are hard pressed to compete against larger, more experienced fund managers. Salvation for small Asian hedge funds may lie in seeding funds – investment vehicles that specifically seek out new and obscure hedge funds in an effort to successfully grow them. Asia-focused FOFs will likely benefit from renewed investor interest, and the overall prospects for Asian funds look promising. Political stability will be a prime determinant of fund growth in Asia. Efforts to establish peaceful and lawful regimes can only help the growth prospects of Asian funds and FOFs.