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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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Across the financial industry, regulation has become the name of the game as officials attempt to reign in risk-taking activities that led to the financial crisis. Unfortunately for the financial industry, much of the regulation is being driven by politics and public opinion, which can be dangerous in a complex environment that is not always understood. Most member of the general public would be unable to distinguish between a hedge fund and a private equity firm, yet these same people are the voters that elect politicians. As a result, many regulations are the result of politicians attempting to look as though they are cracking down on risk taking, when in reality the policies could have unforeseen consequences. In many cases, risk is shifted offshore away from the prying eyes of regulators, which actually may pose a more significant risk to the financial system as a whole.

Impact of Regulation is Global

The question of increased regulation is not only a relevant topic in the United States, but throughout most countries and regions with a developed financial system. Europeans have also recently discussed reforming hedge funds, and more strict controls over such funds in Asia are likely to follow in the near future. This has made the global hedge fund landscape very complex, with most managers uncertain about jurisdictional complexities that impact both their operations and their investor’s ability to efficiently place money with their funds.

Trust is at the Heart of the Debate

Trust of the financial system by the general public has been a core issue in the debate around financial system regulation over the last several years. One issue at the heart of the debate about trust is the exclusiveness of hedge funds, which raises unique issues and concerns. The general public feels separated from this asset class, in that they are generally ineligible to invest their own savings in a hedge fund unless they are high wealth accredited investors. Such funds are then viewed as some privileged secret, designed to take advantage of markets to benefit the rich exclusively. Media coverage indicating the nature of some of the bets made by hedge funds, such as taking positions betting on sovereign nations defaulting, certainly does not help the case in the eyes of the public.

Impacts on Hedge Funds are Very Real

Increasing regulation is not only an academic discussion. The impacts of increased oversight and compliance requirements weigh heavily on fund overhead costs, which then must be passed on to the investor in fees. Unfortunately for hedge funds, fee pressures remain high, due to competition from alternative products that don’t face the same regulatory pressures as well as other hedge funds domiciled in jurisdictions without strenuous rules. Often, hedge funds are forced to look internally for cost reductions in order to cover increasing compliance expenses, and that often means job cuts. Those working in the hedge fund industry should pay close attention to the developing regulatory landscape, as it will have a profound impact on where job growth occurs, and what future jobs look like.

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Hedge Fund Industry Posts Positive Growth in 2013

February 25, 2013

The hedge fund industry saw its assets under management climb to $2.6 trillion in 2012 as strong performance and net investment inflows benefited the sector. Performance alone accounted for $116.3 billion in growth as stronger global markets created more opportunities for hedge fund managers. In terms of investor flows, the sector saw $29 billion in new […]

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The Hedge Fund Industry Has an Ally in European Parliament

January 28, 2013

The growing pressure that the hedge fund industry is facing from regulators and the few individuals that have been willing to stand against the political tide were featured in a recent piece by the Financial News. Syed Kamall is a member of the European Parliament, representing London, one of the hedge fund centers of the […]

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Hedge Fund Industry Marks End of Busy Year for Deals

January 7, 2013

In 2012, large deals in the funds-of-funds segment of the hedge fund industry became a regular occurrence as fund managers sought out bigger partners in order to maintain their position in a difficult economy. According to Pensions and Investments, five of the top twenty-five hedge funds-of-funds managers have changed their ownership structure this year. This […]

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