How to market a fund successfully in Asia

Jan 05, 2011
by Dominic Hobson

Triple A Partners is a third party marketing organisation based in Hong Kong. Its CEO Paul Smith told COOConnect that Asian investors are little different from their counterparts in Europe and North America. They are cautious, and inclined to choose the big names.

Hedge funds running money in Asia from Asia were damaged by the financial crisis. Even funds which sustained performance, and did not succumb to the temptation to gate investors, are finding it hard to put on scale again. Word is that major allocators reckon no more than a dozen Asia regional funds are worthy of their attention. But Asia is also the one part of the world where economies not only grow, but grow fast. Asians are getting rich, and not in vectoral patterns either. There is ample volatility in Asian markets, plus plenty of long only money buying the China growth story. All of which provides tempting opportunities for European and North American hedge funds to ride or short the markets, but especially to tap into the growing wealth of Asian entrepreneurs. In a part of the world where relationships still count, however, it is not easy to find a way of getting in front of the institutions, private banks and family offices that control the newly acquired wealth. Nor is it as easy as it once was to distribute regulated funds to retail investors in the region.

This is where Asia Alternative Asset Partners (Triple A Partners), a third party marketing business based in Hong Kong, fits in. Its chief executive, Paul Smith, is one of the best-known figures in the alternative investments industry. He has now worked in the industry for more than 25 years, initially with Ermitage International in Continental Europe and the Channel Islands, and later with Bank of Bermuda in Hong Kong and latterly New York, where he became head of alternative fund administration after the bank was taken over by HSBC. In that role he looked after the fund accounting and investor servicing needs of 2,000 funds and $250 billion in assets from the HSBC offices in New York. But the heart of Paul Smith has always lain with the smaller, entrepreneurial fund managers that are still the soul of the industry. The rationalisation of the Bank of Bermuda client base by its new owners left little room for smaller funds and dynamic newcomers, and Smith was drawn back to Hong Kong, where in 2007 funds of exactly that kind still flourished.

The initial plan of Triple A was to help them add assets, by introducing funds to investors, and vice-versa. But the projections were subject to rapid revision in 2008, which saw a rush of redemptions from Asian hedge funds, and some close altogether. In terms of assets under management, the road back is proving steep. The times are not propitious anywhere for hedge start-ups, or even established funds below a certain size, and Asian funds are finding it harder to attract investment from Europe and North America. Their counterparts are not finding it any easier to raise money in Asia. Like their counterparts elsewhere, Asian investors have become more risk-averse since the crisis. They are looking for sizeable funds with long track records, and institutional-quality investment disciplines and operations. The legendary brand-consciousness of Asians has added to this trend in favour of larger, better-established funds and a preference for household name funds from London and New York. Smith says start-ups are virtually impossible in Asia in current conditions, and that even longstanding funds of limited size are gradually shedding investors. Triple A is now working mostly with funds from outside the region which are already managing somewhere between $10 billion and $1 billion.

The $1 billion threshold partly reflects the costs of running a sizeable third party marketing business. It takes at least nine to 12 months to attract investors to a fund, and Triple A charges a retainer fee, plus 20 per cent of the management fee and any performance fees earned on assets generated through its efforts. Any fund managing less than $500 million finds costs of that magnitude hard to sustain. Larger, household name fund managers can afford their own marketing teams, further squeezing fund managers considered sub-scale by increasingly cautious Asian investors. Smith nevertheless argues that their approach is often flawed. “Asia is very big, and difficult to access,” says Smith. “Most people know very little about Asia, and tend to appoint someone in one place – usually Hong Kong or Singapore – and expect them to cover the whole region. That is a recipe for disaster. They are stretched too thin. In Asia, you have got to be focused, and demonstrate long term commitment. Asia is still a relationship-driven marketplace. Asians have long memories, and you cannot drop in and out of the market.”

What makes this doubly hard to do is the volatility of the Asian markets. Smith reckons the Asian business cycle turns every four years. This means by the time a fund has attracted investors, it is never more than two years away from the next downturn. It requires courage but especially wherewithal to weather such ups and downs, again putting larger funds at a distinct advantage. Not everyone has demonstrated the necessary qualities. “We are not your final solution,” says Smith. “We can get you a foothold in this region, but building on it requires continuous and consistent effort on your part.” He reckons a minimum commitment of between six and eight years is necessary to build a following among Asian investors. Hedge fund managers have also to deal with tighter regulatory restrictions. The Singaporean authorities in particular have resiled from the low touch regime they introduced to lure hedge funds to the city-state.

“Asian markets are no different from the rest of the world,” says Smith. “They are increasingly regulated, and the regulators are particularly anxious to ensure that investors are not sold inappropriate products. To access markets in Asia you really need a locally registered product.” This is why many hedge fund managers are considering Dublin or Luxembourg listed UCITS funds with a local registration as a route into the market. UCITS funds are well-established in Hong Kong in particular, but registration does not of course equate to distribution. Getting on to the distribution platforms of the regional retail and private banks, and of IFAs, is getting more difficult. Smith says distribution platforms, such as I-Fast, having taken on too many products in the boom years, are now rationalising the number of funds they offer. In Singapore, which has now emerged as one of the premier private banking centres of the world, the international private banks tend to distribute only what head office in Geneva or Zurich has approved.

This means funds seeking Asian investors have first to sell their strategy to private banks in Europe, and then persuade the local account officers throughout Asia to support the actual distribution.

The alternative - selling directly to Asian institutional, high net worth or retail investors - is subject to increasingly onerous regulatory restrictions in most markets of the region. “The safest option is the ‘reverse inquiry,’” says Smith. “If a Japanese investor calls your London office and expresses interest in your fund, you can show them the documentation. What you cannot do is cold-call investors.” It is easy to see how investors might be solicited to make such calls, but Smith naturally considers Triple A the safer option. The firm has secured licences to dispense asset management investment advice and to market and distribute funds in Hong Kong and a fund distribution licence in Australia. The firm also has US broker-dealer and investment advisory licences, allowing it to act on behalf of Asian funds raising assets in the US, and an asset management company licence in the United Kingdom that allows it to do the same in London. Triple A can also promote funds in Japan and South Korea, via locally licensed partners. “It is best to be licensed in all the jurisdictions where you wish to distribute, and to distribute locally registered products only,” says Smith. “That is the only way to stay on-side with the regulators, and to build long term relationships with investors in the region.”

This will mean many different things to different fund managers, for the Asian marketplace is fragmented in terms of institutions as well as geography. As Smith points out, potential investors range from sovereign wealth funds at the top, through pension funds, banks, corporates and insurers in the middle, to the usual suspects in the private banking, family office and high net worth individual sectors. “The challenge in Asia is how to tackle each of these distinct distribution opportunities,” he says. “Each of these groups has their particular buying criteria, and different regulatory requirements.” Though Triple A does not provide an Albourne-style research function, or write or re-write offering memorandums for its clients, it does aim to ensure that it matches funds and investors. Smith advises clients to test-market investment with investors in countries where they can expect to attract interest, and to focus attention on where the enthusiasm is greatest.

This can be hard to elicit. As elsewhere, Asian investors currently have heavy allocations to cash. To tempt them back into the market, says Smith, a fund must offer a household brand name, an unusual set of skills, or an off-the-run investment strategy. For example, Triple A found a real estate derivatives fund attracted a lot of money this year. “If you are running a US equity long/short fund you are going to struggle to sell yourself in Asia, no matter how good you are,” says Smith. “You need something eye-catching.” This reflects a broader realisation among investors (and especially funds of funds) of the high degree of correlation among many of the hedge fund strategies they bought in the last days of the boom. In this sense, too, Asian investors are little different from European or North American investors. The cautious investor, sticking to well-known names, fretting about operational issues, and as anxious about correlation as performance, is now the archetype even in the most freebooting markets in the world. Paul Smith does not say so, but it is hard to believe he would not agree that the romance is going out of the hedge fund business, even in Asia.

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