Asia next stop for incubator hedge fund

The launch of an offshore umbrella hedge fund in Australia will soon be followed by similar funds in Singapore, Japan and Hong Kong.

Bank of Bermuda has teamed up with Goldman Sachs, PriceWaterhouseCoopers (PwC) and Deacons to launch the Kangaroo Fund -- a cut-price incubator hedge fund for small alternative investment managers in Australia.

The fund is designed to help local fund managers attract money from offshore investors by circumventing Australia's rigid and prohibitive tax rules. Managers with less than $10 million under management are eligible to join the fund and will benefit from its offshore jurisdiction.

They will also benefit from a promise by the four members of the Kangaroo consortium to offer their fund establishment and administration services at a low cost. Those signing up for the incubator will pay about $10,000 to establish themselves as hedge fund managers instead of the usual $80,000 outlay. Monthly administration charges will also be a lot lower -- possibly 75% cheaper -- but the managers must be prepared to deal with monthly NAV calculations from Bank of Bermuda, audits scheduled during PwC's slow periods and rationalizing by prime brokers Goldman Sachs.

Paul Smith, head of global fund services for Bank of Bermuda, says the fund is attracting established hedge fund managers who find it difficult to source funds from overseas because of the country's tax environment. "There are plenty of international investors who want to put money with hedge fund managers in Australia but are scared off by high taxes," says Smith, who claims to have four fund managers ready to sign up to the umbrella fund.

Smith expects the Kangaroo Fund will grow to about $20 million in size and include between eight and 12 managers. Each manager in the fund will be treated as a separate entity and will be allowed to stay in the fund as long as their assets under management stay below $10 million each. "If they go above this level, they will be asked to leave," says Joanne Murphy, head of hedge funds for Bank of Bermuda. "At this point we would presume that the manager has a sufficient enough track record to make it on their own."

So far, the fund has attracted most interest from long/short equity managers, says Smith. "We will be doing thorough background checks on each of the managers to make sure that they qualify for the fund," he says. "Since most of the managers have previously worked for large asset management houses, it is easy to do reference checks. Goldman Sachs will be doing the due diligence on their investment processes." Smith says it is likely that Goldman Sachs will limit the amount of leverage a manager can rack up to two times capital.

Smith and his colleague at Bank of Bermuda, David Smith, will act as directors of the fund and plan to visit the managers every quarter. "The due diligence process won't stop on their entry into the fund. We will be visiting them regularly to make sure that they are sticking to the investment strategies outlined in their mandates."

Bank of Bermuda says it is now exploring the opportunity of launching similar funds in Singapore, Japan and Hong Kong. "If the demand is there, it makes sense for us to launch umbrella funds in Asian markets, particularly those where the regulators have shown a willingness to embrace the hedge fund industry," says Murphy. She says Japan and Singapore show more promise at this stage.

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