Hedge Funds Revisited Paul Smith Head of Global Fund Services

1. Hedge Funds RevisitedPaul SmithHead of Global Fund Services May, 2001 Hong Kong

2. Overview of the Hedge Fund Industry • It is estimated that the global hedge fund universe has grown from 300 funds in 1990 to 4000 plus today. • Assets under management suggest a pool of capital exceeding US$400 billion, before leverage. Asia constitutes 12 billion (3%) of that. • Historical performance was based on exploiting inefficiencies in the marketplace. Supply inefficiencies are set to grow thus providing further opportunities. • Hedge funds however continue to be viewed cautiously. The furore surrounding LTCM only serves to exacerbate this issue. Source: Bank of Bermuda

3. Overview of the Hedge Fund Industry • The concept of leveraging remains poorly understood therefore education to mitigate this is needed. • Higher fees and the complex pricing methodologies also take their toll. A simplification of the process will be required in order to meet the demand for greater transparency. • In the competition for a place in the asset allocation model, hedge funds need to ensure that they have both easily understood, and readily available data. • Hedge strategies are often complex, hard to understand and as a result difficult to communicate. This needs to be addressed. Source: Bank of Bermuda

4. Location and Allocation of Asian Based Hedge Managers by Country No of Assets * % of Total Managers as at 31/12/2000 Hong Kong 33 1,476 42 Singapore 11 156 4.5 Japan 13 1,257 36 Thailand 3 33 1 Australia 24 505 15 Malaysia 3 15 .5 Korea 2 35 1 TOTAL 89 3,474 Source: Bank of Bermuda * US$ mn

5. Size of all Asian Managed Funds as at December 31st, 2000 < Million US$ 2% < 10 Million US$ 34% < 100 Million US$ 34% < 1 Billion US$ 6% New or Undisclosed Funds 24% Source: Bank of Bermuda

6. Global Asset Allocation of the Hedge Fund Universe as per HFR (%) FixedIncome / Arbitrage 17 Equity Market Neutral 10 Event Driven 10 Emerging Market 3 Equity Long / Short 37.7 Convertible Arbitrage 2 Global Macro 20 Short Bias 0.3 Source: Bank of Bermuda

7. Asset Allocation of the Asian Hedge Universe ($’s from global pool) * End End 1999 2000 Long / Short Asia inc Japan 33.33 30.21 Long / Short Asia ex Japan 2.58 2.72 Japan Long / Short 55.47 52.17 Japan Market Neutral 6.50 9.31 Others 2.13 5.59 * Source: Asia Hedge

8. Growth Predictions • Hong Kong - Boutique market maintains current momentum and not too many new managers are being seen. The lack of marketing resources within their operations further exacerbates this problem. • Singapore - Boutique managers have benefited historically from the ‘Boutique Manager License’ which provided a long only environment for many. Changes are now underway however with many managers switching their mandates to absolute returns. The MAS are however restricting the maximum to 30 accredited investors. As a result any meaningful change in the regulatory framework will be required to ensure further real growth. Source: Bank of Bermuda

9. Growth Predictions • Australia - Boutique managers had a mixed start, but have benefited from the availability of quality people. The focus is on managers building a solid reputation and the consultant network are aggressively educating the community. The market is poised for considerable growth. • Japan - Japan has seen strong growth. Locally pension funds are focusing on absolute returns and are aggressively setting up fund-of-fund institutions to manage their alternate portfolio management. Hedge funds are therefore well placed to benefit. The Japanese market is considered the prime growth prospect for the region. Source: Bank of Bermuda

10. Conclusion The next phase is for Asian investors to start buying global fund of funds and single manager US/European products. Interest in Asian based managers will mainly come from outside of Asia.