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The industry met in late February at HFM’s Asia Operational Leaders Summit which took place at Macau’s Four Seasons Hotel. Stirring debate among the 200 plus COOs in attendance covered a variety of topics, but what resonated most was: accessing China, developments in operational due diligence, scaling to $1bn, and cybersecurity. Below we outline the examination of these issues from Asia’s operational leadership.

Is China worth the hassle?

In the recent past it was almost universally agreed that there is tremendous potential, both in terms of raising and deploying capital, in mainland China. Yet, there appeared to be more naysayers this year with regards to breaking into China. For those already with a toe-dipped in the water there is no desire to turn back.

“Regardless of market direction and trade wars, the players and hedge funds that have been trying to access China for many years stay committed and interest remains,” said the COO of one hedge fund with an onshore presence.

But, while rules and regulations have been enacted to enable non-Chinese fund managers access to the market there are still many traps and pitfalls that must be avoided to reap any reward.

“Setting up a PFM [private securities investment fund manager] takes a long time and is a frustrating process. You need a local network in order to properly communicate with service providers and regulators. There are discussions happening with regulators and some of the unnecessary obstacles that existed are being removed but many remain,” added the COO.

Another COO with Mainland China operations said that for some managers it doesn’t make sense to set up in China. The reason being that it is difficult to raise capital, and even when that is possible, investors in China are taking a short-term view with regards to performance.

“Investors in China seem more fickle at chasing short-term performance. They are looking at much shorter track records but are likely to redeem as soon as performance dips,” the COO said. “There are a lot of products in China. The assumption that all Chinese investors are desperate to invest their money offshore is not always true.”

Fears that any money made in China is trapped on the Mainland was also a talking point. Yet, one COO said that while it could be difficult it is possible to transfer assets.

“Repatriating money out of China can be done. It requires a lot of documentation and there is a tax on that money,” he said. “We’ve heard from peers who have found it very difficult. The answer is never no, but you’ll find you are more likely to have filled out a form incorrectly when the RMB is weaker.”

Getting even more diligent

Operational due diligence is getting tougher on Asia’s hedge fund managers. More data, more often. That was the message from one hedge fund consultant.

“The biggest change we have made is for more frequent monitoring of hedge funds. We used to do more of a yearly audit and there may have not been much contact throughout the year,” the consultant added. “Now we are visiting every six months on a risk-based approach where a manager who may be in a state of flux might require an onsite visit.”

But COOs said that there needs to be a limit to how much information they can provide.

“It’s a bit of a dance, how much information you can give and what is a reasonable request from an investor,” said the COO of one $1bn Hong Kong-based hedge fund. “You certainly have to say no and set limits to what you can give investors. You can be creative in what you provide. If you want to raise capital, you will have to come up with ways of getting information that will get them comfortable with investing money in you.”

Another added that some investors and consultants will have ODD processes that a start-up manager could never meet.

COOs also highlighted the need to be prepared to answer questions about all members of staff and not just processes.

“Be aware of social media and what is out there about your business. We do a deep dive on senior management every year,” said one Hong Kong-based COO. “There are false positives and hits out there and you want to be aware of them before an investor asks about them.”

There is also greater willingness among consultants and investors to get to know junior staff too. The COOs said that they are happy to put the more junior staff in front of investors as it is also a good way of understanding them and testing them out.

Cyber-security

The increasing sophistication of cyber attacks and increasing focus on the issue among regulators was hotly debated at the event. From COOs saying that regulating cyber-security at hedge funds is no longer the “box tick” exercise it used to be.

“Cyber is a space where demands continue to increase. It’s often referred to as an ‘arms race’ or ‘war’ and if you are not keeping pace the consequences are catastrophic,” added on COO. “Especially as brands in the hedge fund space are so fragile, it’s not just bad PR but it can kill a business in this world.”

Recent research from HFM Insights highlighted that manager’s typically think they are in line or ahead of the curve (see chart, right).

“We do penetration tests to check vulnerability but there is a need to focus on the human risk too. We do tests and try and turn them into teachable moments for the firm when we get a failure,” said one COO at the event.

Yet, one consultant disagreed when it comes to managers in Asia.

“There is a regional weakness in Asia and there are not enough managers training staff or conducting phishing tests, and incident response plans are not well documented in this region,” he sai

Macau: Looking down from the summit on AsiaHedge.


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