For Michael Preiss, whose firm oversees $1.9 billion mainly for wealthy Asian families, adding hedge funds to his clients’ portfolios was an easy sell some years ago. Not anymore.
The executive director at the Singapore-based Taurus Wealth Advisors Pte multi-family office said his clients are disappointed with mediocre hedge fund returns and are balking at high fees, prompting them to shift to private equity.
With redemptions already at a four-year high, Asia’s richest people comprise an investor group regional hedge funds can ill afford to lose. Family offices representing billionaires and multi-millionaires are a key source of capital in Asia, where global pension funds and university endowments haven’t made large inroads. Managers seeking money for new hedge funds are likely to be the hardest hit.
“Asia’s hedge funds are smaller than their global peers, meaning they are more dependent on money from high-net-worth individuals and family offices,” said Melvyn Teo, professor of finance at Singapore Management University. “If family offices withdraw money, the region’s hedge fund industry will clearly feel the pinch.”
UBS Group AG in November said family offices worldwide have turned away from hedge funds after they trailed stock markets in the wake of the 2008 financial crisis. The trend is even more pronounced in Asia, where family offices set more aggressive performance goals, according to Eric Landolt, UBS’s head of family advisory for Asia Pacific.
Growth Engine
“Family offices are usually here to add wealth to the family,” said Landolt. “It is a growth engine for the family, whereas in Europe or the U.S. there is a much stronger wealth-preservation angle.”
Managers seeking capital from outside Asia may find few takers. Ray Nolte, chief investment officer of $8 billion U.S.-based fund of hedge funds SkyBridge Capital, last month said he’s shunning Asian hedge funds because of mounting risks in China’s debt markets. SkyBridge has less than 5 percent of its assets in Asian hedge funds, Nolte said. That compares with 85 percent in the U.S. and 10 percent in Europe.
Hedge funds investing in Asia suffered $1.6 billion of withdrawals through November, on track for the biggest outflows in four years, as their returns trailed the industry globally, according to the latest estimates from data provider Eurekahedge Pte.
“The big hedge funds have become complacent, meaning they put more emphasis on the management fee than performance fee,” Taurus’s Preiss said. “For instance, a $1 billion fund tends to focus on capital preservation and getting the management fee instead of working on a decent performance.”