(Bloomberg) — The big guys are backing Asias hedge-fund startups.
KKR & Co., Ziff Brothers Investments and Goldman Sachs Group Inc.s money management unit entered partnerships providing startup capital to hedge funds in the region for the first time in the past year. Blackstone Group LP, the worlds largest alternative asset manager, struck its second regional seed deal after a five-year hiatus, supporting a new fund in exchange for a share of its revenue.
Such early-stage backing to help funds get off the ground now often involves at least $100 million, more than double the size of deals in previous years. For startup founders, the deals provide a gateway to institutional investors — such as pensions, endowments and sovereign wealth funds — that account for a swelling share of money invested in hedge funds.
Theres money on the table and money is meeting the talent, said Myo Schollum, Asia head of hedge-fund coverage on the prime-brokerage team of Credit Suisse Group AG. Prime brokers provide services to hedge funds including securities lending and linking them to potential investors.
The deals have arrived as long-term Asia-focused traders have been leaving global hedge funds such as SAC Capital Advisors and Soros Fund Management that have returned client capital. More are departing from large banks moving to comply with post-2008 rules curbing their risk-taking activities.
Global Leaders
Asian hedge funds outperformed global peers for three consecutive years. Eurekahedge Ptes Asian hedge-fund index generated an annualized return of 10.4 percent in the three years to December, 3.7 percentage points above the global industry gauge.
The region drew at least $14 billion of net inflows in 2013 and 2014 combined, after spending three years longer than the global industry to recover assets lost during the 2008 crisis, according to the Singapore-based data provider.
Among those striking deals with large backers is Feng Hsiung, former regional head of York Capital Management whos starting his own pan-Asian event-driven hedge fund in the first quarter. He formed a long-term strategic partnership with KKR, the New York-based private-equity firm run by billionaires Henry Kravis and George Roberts.
Ziff Brothers is an anchor investor in a Hong Kong-based firm set up by its former Asia head Gregard Heje. Goldman Sachss asset management unit provided capital to Hong Kong- based Trilogy Partners.
Blackstone Commitment
Blackstone committed $200 million to a special situations hedge fund founded last year by Hong Kong-based Jason Brown, formerly of Goldman Sachs. The New York-based firm last seeded a regional startup in 2009, supplying $150 million to former Citadel and Credit Suisse trader Nick Taylors Hong Kong event- driven hedge fund.
TPG Capital has thrown its backing behind Hong Kong-based HS Group, led by Blackstone and Goldman Sachs alumni. HS agreed to two seeding deals last year, backing a fund started by former Soros Fund Management Asia specialists Kenneth Lee and Michael Yoshino, and another to be founded by alumni of BlackRock Inc., Macquarie Group Ltd. and Millennium Capital Management.
Also joining the fray is Alibaba Group Holding Ltd. Vice Chairman Joseph Tsai, who pledged the bulk of a $100 million commitment to a hedge fund founded by former SAC manager Andrew Bazarian last year. Dymon Asia Capital (Singapore) teamed up with Singapore state-owned investment company Temasek Holdings Pte to back new hedge-fund managers.
Smaller Seeds
Historically, seeding deals in Asia had been mostly smaller than $50 million. Net inflows into the regional industry allowed managers to expand assets quickly, said Max Gottschalk, co- founder of Gottex Fund Management Holdings Ltd.s fund-of-hedge- fund business, another backer of HS.
Nowadays, only 6 percent of investors are likely to invest in a new hedge fund at inception without sweeteners such as lower fees or revenue sharing, according to a 2014 Credit Suisse survey.
Even star traders are open to giving away some revenue in exchange for large startup deals as money from European funds of funds, drivers of the pre-2008 Asian boom, has dried up. That has left startups to vie with established peers for money from pensions, endowments, foundations and insurers, mostly from North America.
No matter how big you think your reputation is, there are just not many people walking in with a lot of money on day one any more, said Richard Johnston, Asia head of Albourne Partners Ltd., a London-based adviser for hedge-fund and private-equity investors. Bigger seeders can now get better people than they could before.
New Small
Institutional investors share of hedge funds global assets doubled to two-thirds since the financial crisis, according to a Deutsche Bank AG report last year.
Institutions that increasingly allocate directly to hedge funds tend to spread their billions of dollars among no more than 20 hedge funds globally to control the resources and costs associated with finding and monitoring their investments, said Albournes Johnston.
Albournes institutional-investor clients requested in- depth research and monitoring of about 67 Asian hedge funds last year, 20 percent fewer than the year before, he said. The hedge funds assets rose by an average of 20 percent, reflecting a trend for institutions to cluster around bigger managers.
The majority of allocations to Asian hedge funds Albourne is seeing involve more than $50 million each. Because most institutions cap their investments at 10 percent of a single funds assets to manage risk, funds need to already manage $400 million to get on the institutional radar.
Half a billion is the new small, Johnston added.
The average new Asian hedge fund set up in 2014 raised $19 million at inception, 34 percent off the 2009 amount, according to Eurekahedge. The typical regional hedge fund, young or old, oversaw $117 million by the end of December.
Less Distractions
Strategic investors can now find experienced managers who have been trained at global hedge funds to manage risks through different market cycles, said Shane Bolton, Hong Kong-based head of Asia prime brokerage at Goldman Sachs.
For the new funds, large startup capital deals allow them to focus on investment and producing returns earlier on without the distraction of having to raise money to make the fund viable and investable, he said.
Most managers launching hedge funds underestimate how much work it is, he added. People who have the luxury of a seeders backing can lean on their support and concentrate on portfolio management.
Isometric Investment Advisors, Blacks Link Capital and Minerva Macro Fund were among young Asian hedge funds that shuttered in the last few years because they failed to attract a wider group of investors to survive when seeders withdrew capital.
There have been signs of initial success at funds involved in the big partnerships of the past year. Assets of HS-backed Pleiad rose to nearly $500 million by last month after starting trading on Sept. 1 with just over $150 million.
At the end of the day, everybody sees that the bigger seeds are more likely to succeed, said Johnston. The smaller seed deals just have a bad track record of failure.
