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Over the past several years, large U.S. institutions have become an increasingly large portion of hedge fund inflows. In fact, according to a recent Reuter’s article, pension funds, endowments and other large scale American money managers now account for up to three quarters of new money flows into the hedge fund sector. Accordingly, the importance of attracting American assets is growing for European, and even Asian, hedge funds, though significant challenges remain for those trying to enter the U.S. market.

U.S. Regulation Poses Significant Hurdle

One of the major barriers for foreign hedge funds in terms of accessing US investors is the complexity and cost of American regulation. One high-profile hedge fund executive from Europe told Reuters that, “(in terms of regulation) the worst in the U.S.” The requirement to register with both the Securities and Exchange Commission and the Commodity Futures Trading Commission is one such barrier. Many hedge fund managers view the multiple regulators as a hassle, and often face contradictory regulation.

Tax issues also weigh heavily on hedge fund managers looking for U.S. investment. The Foreign Account Tax Compliance Act, or FATCA, will compel all foreign financial institutions to turn over account details to the Internal Revenue Service for American taxpayers with accounts over $50,000. Since tax status is often complex and the penalties for non-compliance are significant, hedge fund views this new regulation as a significant source of regulatory risk.

Competition from U.S. Firms is Fierce as They Defend Their Turf

Foreign hedge funds don’t only have to worry about increasingly vigilant U.S. regulators, but also the fierce competition coming from domestic fund managers within the U.S.  Fund managers looking to crack into the market are having second thoughts about expending resources on what might be an unsuccessful venture.

“The U.S. is the largest market but is very competitive. All our largest competitors are based there. What sense does it make to deploy a tremendous effort with much less success?” Arie Assayag of UBP Alternative Investments, a European Fund Manager, told Reuters.

One of the largest fund managers in Europe, London-based Man Group, has had a similarly negative experience entering the United States market. Despite an intensive effort over several years, American investors still only account for 8 percent of its client base. In response, the company has hired the former head of an American hedge fund, John Rohal, in order to work on improving its attraction of U.S. clients.

This approach seems to be common across the industry and offers an opportunity for American hedge fund professionals looking for an international career. Their inside knowledge of the regulation system and what American clients are seeking can be of significant value to international firms.

And foreign hedge funds do have a competitive advantage, or at least a differentiating factor, when compared to their U.S. peers. Such funds can be viewed as having superior insight in the markets in which they are domiciled, providing potentially superior returns compared to American fund managers investing in the same market. Selling that competitive advantage could offer a significant opportunity for foreign funds in the United States.

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According to a recent Bloomberg report, all is not well in the Asia hedge fund job market. Many high performing professionals that joined the rush to the promising boom in Asian hedge funds are now returning to the United States or Europe, or are alternatively leaving the industry for other areas of finance. Funds in the area have struggled to grow their asset bases, and regulatory changes certainly are not allowing for a positive outlook.

Asian Hedge Funds Continue to Struggle to Attract Assets

Following the 2008 global financial crisis, many overseas hedge funds saw a flight of capital returning to traditional destinations such as the United States. Unfortunately for the hedge fund desks of Hong Kong, Singapore and Malaysia, this capital has failed to return in the subsequent rebound. Currently, Asian hedge fund assets sit 28 percent below their 2007 peak, putting real pressure on firms to reduce costs in these jurisdictions. Globally, the opposite has been true, with hedge funds seeing a 21 percent increase in total assets to a new high of $2.3 trillion in December of 2012. This represents a real shift in assets back to traditional investment markets.

Performance has also been an ongoing issue in the region, with only 39 percent of Asian hedge funds entitled to performance fees for being above their high-water marks at the end of 2012. Without stronger bottom line results for investors, the attractiveness of investing overseas will certainly continue to decline, putting even greater pressure on hedge funds in the region.

Promise Not Living Up to Expectations

For many hedge fund professionals that made the move to Asia, the promise of expansive opportunity and high compensation has remained unfulfilled. According to Will Tan, Managing Director of a leading Singapore financial recruiting firm, “five years on, many of these guys are tired of the huge swings in hedge-fund compensation and some have not tasted the sweet promise of hedge-fund payouts.”

The dissatisfaction with results in Asia has led some individuals not only to reconsider their careers geographically, but leave the hedge fund industry altogether. According to Tan, many “long-time veterans (are) leaving the hedge fund space for more stable careers in finance.”

Smaller Funds Comprise the Majority of Asian Hedge Funds

One major shift over the last several years has been the emergence of smaller hedge funds in the Asian market. Currently, 54% of Asian hedge funds manage less than $50 million, which is up considerably from 39 percent just 5 years ago. Unfortunately for the smaller funds, the risk management policies of large investors sometimes prohibit allocating investment to those managing less than certain critical hurdle amounts, further reducing the number of interested investors.

Uncertainty and Volatility to Remain

While the story surrounding Asian hedge fund employment certainly does not appear too optimistic today, it’s important to keep the region in perspective. The geographic area contains several of the world’s fastest growing economies and is also home to an increasing amount of privatization of traditional government monopolies. These trends bode well for the investment industry, and there may be a cyclical rebound in future years. That said, increasing regulation and concerns over risk management from investors based in traditional markets will continue to weigh on the industry. As a result, uncertainty and volatility will continue to be underlying attributes to the Asian hedge fund market for the foreseeable future.

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