Pass it on – Nextgen Asia a growth opportunity for emerging hedge funds

shanghai, china, east asia
Insight by

● Asian financial wealth to grow by $22 trillion by 2025*

● Generational shift heralds change in management of Asia family offices

● Cowen pledges “high-touch”, long-term support for Asian hedge fund start-ups

Rapid growth in wealth in Asia in recent years shows no sign of slowing and could present a golden opportunity for hedge funds and other money managers.

There were more billionaires in Asia than in North America or Western Europe in 2020, according to a report from Swiss bank UBS, and wealth accumulation is forecast to stay strong. Boston Consulting Group’s Wealth Report 2021 says total global financial wealth hit a record $250 trillion last year and a further $65 trillion is expected to be generated by 2025, led by North America ($25 trillion), with Asia close behind on $22 trillion.

Yet the BCG report says Asia has relatively low levels of wealth management penetration and that assets under management (AUM) in the region will increase by a compound annual growth rate of 11.6 percent between 2021 and 2025.

Hong Kong based Ortwin Gierhake, Director of Prime Brokerage Sales for Global Investment Bank Cowen said, “The difference between Europe, the U.S. and Asia is that wealth creation has been much more recent in Asia and so the structures are much newer.”

The Generational Shift

Industry insiders detect a change among Asia’s super-rich linked to a generational shift. Younger, highly educated men and women are seeking more sophisticated and efficient ways to manage their assets, leading to a growth in family offices.

“A lot of families are handing over to the next generation. They are looking at established relationships and the way things are done, with an intention to professionalise and institutionalise more,” said Ortwin Gierhake.

Cowen, a full-service prime broker (PB) offering capital introduction, securities lending, trading, operational support and much more, has strong links with family offices across the globe.

Cowen has worked with numerous hedge fund start-ups in Asia and understands the requirements and challenges facing emerging fund managers as they leave the security of a big firm to go it alone.

While not among the bulge-bracket PBs, Cowen prides itself on providing institutional grade solutions to both established and emerging managers alike. “That’s where we are differentiated. We provide tailored solutions for any size managers at any stage of their growth – we don’t have a one-size-fits all approach,” Gierhake said.

In practice, this means Cowen is with hedge fund start-ups every step of the way. From a personalised approach to capital introduction and the full suite of prime brokerage solutions, to offering access to a wide range of trusted service providers essential for a successful fund launch.

Important Decisions

“It’s incredibly hard. Starting a hedge fund gets more difficult every year,” Gierhake said. “It takes time and it’s very expensive. It takes passion because there are plenty of other opportunities to run money.”

For the would-be hedge fund chief investment officer (CIO), undaunted by the prospect of a year of cash flowing out before any comes in, Gierhake says there are two big decisions to be made from the start.

Hiring the right COO is key

“As a CIO, you’re starting a business and need to acknowledge that the first and most important hire is the COO (chief operating officer) because they will ensure the company aspect of the fund is running successfully,” says Gierhake.

Know your ambitions – define the business model

The second early decision is what kind of hedge fund the start-up wants to become. Who are the target investors? Where are they based? How much money will they want to invest? Is that too much? Answering these questions will largely determine how the fund is set up and where.

“Do you want to build something with expectations that world-famous allocators are going to invest in you? Or is it something where you say ‘I’m happy to start small with very limited investment, only family and friends.’ It is key to establish this at the outset as it influences the way things are set up,” Gierhake said.

The COO looks after all the non-investment parts of the business, including the vital and onerous details of due diligence and compliance. But beyond the day-to-day tasks, the choice of COO can also determine the appeal of the fund to potential investors.

“The right COO is someone who is experienced, with credibility, but who also works with and is respected by the CIO,” Gierhake said. “Investors will look at performance but also at the overall set-up of the fund.”

What next?

With these fundamental issues settled, the prospective hedge fund manager needs to pick a law firm, an accountant and prime broker. Some funds will use several PBs, possibly led by a bulge bracket bank. Cowen’s high touch approach, underpinned by an extensive product suite and experience building successful businesses, delivers highly personalised solutions whether operating as a primary, second or third PB. This stands out in an industry where, traditionally, this level of support is reserved for the larger funds.

Another key role the start-up must fill is fund administrator, whose tasks include pricing securities held by the fund to calculate net asset value, and regular financial reporting.

Lawyer, accountant, fund administrator – where is the money coming from for their salaries? The good news is that prime brokers like Cowen are able to link up funds with a wide array of service providers.

“People are more and more willing to outsource services, especially here in Asia, where funds and start-ups tend to be smaller,” Gierhake said.

Gold-plated or cost-efficient?

Once again, Gierhake cautions the CIO to match expenditure on services with the overall scope of the fund. “We have a long list of service providers. What do you need? Do you need the gold-plated service or the cost-efficient service?” Service providers can manage everything from finding and fitting out office space to selecting an IT system.

Before approaching potential investors, fledgling funds need to draw up compelling marketing material that outlines their strategy in all the detail an allocator handing over $50 million might need and, separately, in a vivid one-pager. Cowen can help organise the material for maximum impact.

For clients who want to choose their own providers, Cowen can arrange introductions to the many consultants eager to help.

Additionally, a key growth area has been outsourced trading, which saves the cost of in-house infrastructure and traders’ salaries and is often combined with outsourced middle office functions.

And capital introduction?

Cowen, in contrast to many other prime brokers who have recently reduced head count, has expanded its capital introduction team, adding Amy Cheung as Vice President in Hong Kong in June.

Cheung said that when allocators consider investing in a fund, they would expect a track record of 3-5 years. “They definitely look at longevity. Once they are invested, they want to be there for the long term so they don’t want to see a bunch of people that haven’t worked together before starting a business.”

“The way we differentiate in capital introduction is that we tend focus more on the family office and fund-of-funds space because, traditionally the family office guys are more open to exploring emerging managers. They don’t focus that much on the size of the fund and they have more flexibility,” Cheung said.

Half of Cowen’s capital introduction team previously worked as allocators and half have a hedge fund marketing background. They have dealt with all sorts of investors and can help funds prepare for the 100-page questionnaire a pension fund or endowment would want to see before deciding whether to invest.

The lion’s share of money invested in Asia funds has traditionally come from the United States and Cheung said there were a few “seeders” dedicated to make early investments in Asian funds as the eyes and ears of the region on behalf of clients based in the U.S. or Europe.

Singapore, Hong Kong structures lure hedge funds

Where the investors come from will be crucial in deciding where the fund is domiciled. Setting up a fund in some jurisdictions is easier and taxes are lower than in others. As in other regions, the Cayman Islands and the British Virgin Islands are popular for offshore vehicles managed in Asia.

At the same time, some Asian authorities are working hard to attract funds. The Monetary Authority of Singapore launched the VCC (Variable Capital Company) scheme in early 2020 and promised to co-fund up to 70 percent of eligible spending on Singapore-based service providers. Some months later, Hong Kong launched Limited Partnership Funds for private equity funds – a move lawyers said could see more such funds domiciled onshore.

Taking the plunge

For the manager unfazed by this to-do list and who still wants to run his or her own hedge fund, Gierhake recommends they have a serious word with their partner before taking the plunge. If they are on board, maybe the next call should be to Cowen.

While the challenges of launching a successful hedge fund are significant, it is clear that the start-up faces fundamental choices along the way: from the size of the fund, the target investors, and the most appropriate service providers, to name just a few.

It is also clear that a prime broker with the experience, contacts and local knowledge of Cowen, that pledge hands-on service for start-ups, is an invaluable guide on the journey.

Gierhake sums it up like this: “Our business model enables us to work with any size fund, whether in launch or growth phase. We pride ourselves on our institutional grade high-touch service, with specialist expertise in helping emerging managers to launch and grow their business. We welcome the opportunity to support hedge fund start-ups in Asia as they make the big step and go it alone”

*Report by Boston Consulting Group

Stay tuned as Cowen launches a series of resources to help emerging fund managers in Asia to understand the requirements of starting up, and help them launch and grow successful businesses.

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