As regulators in developed markets step up oversight of hedge funds, these free pools of capital are increasingly set to make their home in Singapore and Hong Kong.
That will accelerate the flow of talent and foreign funds into Asia's top two financial centers, at a time when asset managers are already eyeing the region's rising wealth and strong economic growth.
Assets of Asia (ex-Japan) funds are seen rising 70 percent over the next two years, outpacing the 50 percent growth in global assets, according to industry estimates.
"Asia, and Singapore in particular, could definitely benefit from the stupid regulatory environment in Europe," said Lionel Martellini, director of France's EDHEC Risk and Asset Management Research Center.
Scrutiny of hedge funds has heightened in Europe as politicians in Germany and France blamed the industry for causing the financial crisis — though the crisis was caused more by regulated banks in the United States, Martellini said.
The G-20 nations want greater supervision of hedge funds, with the European Union debating more contentious rules that could make it harder to offer non-EU funds to European investors. London has objected to the proposed EU rules.
Tim Rainsford, managing director Asia Pacific at hedge fund manager Man Investments, which manages $39 billion globally, said the increasing focus on emerging markets was also playing a key role in encouraging hedge funds to move to Asia.
"Certainly regulation always has some influence on where hedge funds choose to start or establish themselves. But I actually think that outside of their regulatory environment, much more importantly, is that the hedge funds always have done and will continue to follow very closely the flow of global capital."
He said hedge funds are seeking exposure to Asia, encouraged by the developments in China as a global engine of growth as well as the growing importance of Asian currencies to global trade.
Hedge funds with Asia ex-Japan mandates had assets of $105 billion at the end of 2009, or about 7 percent of global hedge fund assets of around $1.5 trillion, Singapore-based consultancy Eurekahedge estimates.
By the end of 2012, that will rise to at least $182 billion, as global hedge fund assets grow to $2.25 trillion.
A Deutsche Bank survey of the hedge fund industry in March showed 45 percent of investors wanted to raise allocations to Asia (ex-Japan) funds, compared with 18 percent in 2009.
Singapore, which has not escaped the global pressure to regulate derivatives and hedge funds, recently proposed regulations to license bigger hedge funds and force smaller funds to maintain a minimum capital base.
These rules are set to increase costs, especially for startups, but will not halt the wave of new funds heading to Asia.
New York-based Fortress Investment is planning to return to the region through a Singapore office. Soros Fund Management is eyeing Hong Kong for its Asia office and London-based Algebris Investments plans to operate an Asia office from Singapore.
U.K.-based hedge fund firm Prana Capital is setting up an office in Singapore and its founder, Peregrine Cust, will relocate to the city-state.
"The regulatory arbitrage that Singapore has will be reduced to a certain extent when it moves to the licensing regime which is a bit more stringent," said Lian Chuan Yeoh, an attorney with Allen & Overy in Singapore.
"But the regime is still not heavy touch, it is pretty much similar to what people expect these days. There will be a few more capital requirements, more requirements on compliance, but it's nothing too onerous," Yeoh said.
Tax rates on top earners of 17 percent in Hong Kong and 20 percent in Singapore compare favorably with the U.K., especially given a controversial plan to raise the highest British rate to 50 percent from 40 percent.
Start-up costs are also generally lower than in London's expensive West End — Europe's hedge fund hub — and boutique funds can therefore get going with smaller asset bases than the $50 million or $100 million that many in the U.K. see as critical mass.
But some strategies may struggle in Asia because the region's financial markets do not match the depth seen in the West. Citadel Group, for example, more than a year ago trimmed its special situations team in Hong Kong.
Data from Eurekahedge also shows that about half of hedge fund strategies employed in Hong Kong and Singapore are focused on long or short equities strategies.
"Managers will consider relocating to Asia as long as they know that major institutional investors such as pension funds, endowments, insurance companies and foundations in the region are there to invest in alternative investment schemes," said Aureliano Gentilini, hedge fund research head at Lipper, a unit of Thomson Reuters.
That trend is gathering pace. The Government of Singapore Investment Corp has been increasing its allocation to alternative investments, while China Investment Corp last year allocated $500 million in a hedge fund unit of Blackstone Group.
"I can say from my conversations with institutional investors around the region, not only are they planning to maintain their hedge fund allocation, I think in many instances, they are planning to increase those over time," Man Investments' Rainsford said.
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