Mid-sized Asian hedge funds are poised to receive major money inflows this year, as some of the region's biggest managers shut doors to new investors on fears that running bulky portfolios could harm returns.
Industry tracker Eurekahedge estimates that in 2010 nearly 30 Asia focused funds stopped accepting money from new clients, in what is also known as a "soft close". This compared with around 15 in 2009. That means that this year, there is potentially more money sloshing around for Asia's mid-sized hedge funds, which typically manage $50 million to $250 million.
These funds are expected to benefit from the overflow, in turn boosting the size and clout of the $125 billion Asia hedge fund industry.
"Given the increase in the number of managers that we are seeing soft close, we expect investors will turn their attention to some of the newer and smaller managers that have launched in the last 12-18 months," says James Fallon, director, financing sales, at BofA Merrill Lynch in Hong Kong.
The impact of the so-called "waterfall effect" remains to be seen and analysts say it is difficult to estimate the size of the potential overflow. Still, fund managers, analysts and prime brokers say that should the mid-size funds reap the benefits of such an overflow, the phenomenon would set the stage for the industry's next phase of growth.
Not only will it lift the size of the funds, but a growth in assets for the middle players could increase investment options for institutional investors, and expand fee opportunities for service providers such as consultants and prime brokers. Farhan Mumtaz, a senior analyst at Eurekahedge, estimates the main beneficiaries of the asset overflow from the closed big hedge funds would be those managing $100 million or more.
Mid-sized funds in Asia should also benefit from a large number of global institutional investors looking to raise exposure to the region, analysts said. Nearly two-thirds of the 100 leading institutional investors in hedge funds from around the world expect Asia to present the best opportunity in 2011, according to a survey by Preqin, a research firm focusing on alternative assets.
By turning towards mid-sized managers in Asia, institutional investors in the region will not be cheated out of higher returns, industry data suggests. The Eurekahedge index for medium-sized Asian hedge funds was up 10.2 percent in 2010, outperforming the 9.7 percent gain in the index tracking large managers. Mid-sized funds also have a relatively higher sharpe ratio, which shows that they earned returns at lower risk.
The performance has prompted some of Asia's mid-sized funds or middies to step up marketing in the West to tap a small but growing rank of investors who are frustrated by returns at big funds.
"Investors are saying the performance last year of big guys was poor. Let's give the little guys a chance. Let's start with the best of the little guys," said Stephen Good, co-founder of Sydney-based hedge fund Instinct Capital. Good's Japan focused hedge fund increased assets by tenfold to $100 million last year, backed by a 33 percent return.