Sep 25, 2015, 11:20 AM ETPanel

Asia Summit 2015 - How to Build a Great Hedge Fund in Asia

Global hedge fund assets exceed $2 trillion, with Asia accounting for roughly 9% ($200 billion), a 16-fold increase since 2000.
Asset growth in Asia plateaued post-2008, with end-2014 levels matching pre-GFC (2007) figures, indicating a stagnation period after a pre-2008 boom.
Survival rates for Asian hedge funds are lower than North American peers, with many failing to survive beyond the first five years of inception.
The industry is shifting from a phase of "hall pass" leniency to one demanding global institutional standards for infrastructure, risk management, compliance, and legal frameworks.

Infrastructure: Institutional investors rank operational infrastructure (risk, compliance, legal) as the primary selection criterion, often above raw returns.
Alignment of Interest: Firms must align internal culture with investor interests, demonstrated by actions such as voluntary fee clawbacks during drawdowns.
- Example: Diamond Asia's macro fund voluntarily clawed back fees from 2014 to offset a 10% loss in early 2015, resulting in $500 million in inflows despite the negative performance.
Process and Culture: Success requires a distinct philosophy, the ability to attract and retain talent, and a culture of humility that acknowledges market efficiency.
- Firms must obsess over their "edge," admitting mistakes transparently to a team of high-performing individuals.
- Building a team focus is critical; in downturns, teams must avoid finger-pointing and collaborate on solutions rather than assigning blame.
Technology as IP: Hedge funds are increasingly viewed as IP businesses requiring significant investment in technology and IT infrastructure to differentiate delivery modes.
Regulatory Oversight: Firms running global businesses should voluntarily submit to regulatory oversight in as many jurisdictions as possible to ensure compliance.

Talent Scarcity: Asia lacks the deep bench of experienced hedge fund professionals found in North America or Europe due to high employee turnover and shorter tenures in the region.
Cultural Diversity: Managing teams with 21+ nationalities (as seen at Diamond Asia) requires constant effort to engender a collaborative culture amidst diverse cultural backgrounds.
In-House Sourcing: Unlike the US, Asian sovereign wealth funds often manage assets in-house, potentially crowding out external management opportunities.
Local Presence Requirement: Investors now demand that managers be physically present in Asia to access local networks and generate original research, moving away from funds managed remotely from London or New York.

Timing and Partners:
- Diamond Asia launched one month before the 2008 Financial Crisis (Lehman collapse), facing a 13% drop in two months before stabilizing with support from a strategic partner (Tudor Investment Corporation).
- Sanrigan Capital launched in late 2009, securing a strategic investment from Blackstone early on to provide operational guidance and critical mass during a difficult fundraising environment.
Operational Lessons:
- Early-stage funds should prioritize returns and keep costs low (e.g., small office space) to focus on performance rather than fundraising distractions.
- Founders should avoid tailoring fund prospectuses (PPMs) to the "lowest common denominator" of investor fears, which can create internal conflicts.
Risk Management Adaptation:
- Diamond Asia instituted a 4% monthly circuit breaker post-GFC to manage volatility in an "unusual" monetary environment.
- Managers must ensure all LPs understand not just the base case business plan but also the "five standard deviation" (extreme stress) scenarios to prevent redemption runs during crises.

Domain Constraints: Managers should not expand their investment strategies beyond their core domain expertise without establishing a separate infrastructure and team to avoid subsidizing new ventures with existing investor capital.
Talent Acquisition: There is a severe shortage of operational and strategic management talent in Asia; firms often recruit senior operational leaders from the US or Europe to fill this gap.
Second and Third Generation Growth: Growth is expected to be driven by the maturation of the talent pool, allowing for larger funds and more managers, though this process is slow and non-linear.
Geographic Mandates:
- Pan-Asian focus remains the norm; managers like Broad Peak view global mandates outside their expertise as a risk to investor confidence.
- Expansion is generally limited to adjacent areas (e.g., public equity to private space in China) rather than geographic diversification into unrelated regions.
Liquid Alternatives Impact: The rise of liquid alternatives has not yet drastically changed entry liquidity for event-driven funds, though it increases competition for simple, announced deals (M&A) while leaving complex, process-driven deals to traditional managers.