New Hedge Funds Survive Better in Asia Than the U.S.

(Bloomberg) -- New hedge fund firms have a higher rate of survival in Asia than the U.S., according to an internal study by Goldman Sachs Group Inc.

The research, compiled in July, showed that the bank’s prime brokerage business in Asia worked with 129 hedge fund startups over the 10 years through 2018, with 64% of them still alive. That compares with 52% for the 468 launches Goldman took on in the U.S.

More than two-thirds of Goldman’s startup clients in Asia began with $50 million or less. Hedge funds in the region often start smaller and take longer to expand their AUM because of a fledgling homegrown investor base and the geographical distance from the big pools of pension and endowment money. Still, partnering with the promising ones early earns goodwill and a bigger chunk of the business when they grow large.

“One of these funds could be the next Segantii or Quantedge, which started with humble beginnings but are now part of the elite billion-dollar hedge fund club,” said Eurekahedge Pte’s Singapore-based head analyst of hedge fund research and indexation, Mohammad Hassan, referring to two shops that have found success in Asia.

The Goldman survey found, though, that the smaller the fund at inception, the higher its chance of crashing and burning:

And that hedge funds launched just before a market correction often had a lower survival rate:

“For funds that started in 2010 and 2013, market conditions in the years following were among the toughest,” said Goldman Sachs’ head of Asia-Pacific prime services, Padideh Raphael. “Supportive performance in the early years of a fund is a key factor underpinning AUM growth.”

In other highlights:

• The median AUM at launch of the 129 funds Goldman’s prime brokerage unit took on was $30 million, while the average was $75 million
• Goldman Sachs added 40% more mandates from hedge fund clients in Asia this year versus 2018, with about 20% of them startups, according to Raphael

“Activity in China equity long-short is the biggest driver this year,” she said, adding that as China opens up its financial markets and hedge-fund strategies expand, investors are more attracted to the opportunities there.

Prime brokers provide services including clearing trades, lending cash and securities to hedge funds, as well as linking them to potential investors and advising them on matters such as regulatory compliance. The unit is often used to boost revenue for the rest of the bank.

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net

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