The alternative-investment industry has always been designed for large institutional investors. An old-school hedge-fund manager in Singapore, Chua Soon Hock, is helping change this.
The people who run hedge funds, private equity funds and venture capital funds serve as general partners, or GPs: they operate the business and are fully liable for it. Because they pursue strategies that are risky, illiquid, and specialist, by law and by practice they cater strictly to institutional investors who are structured as limited partners (LPs) in these private businesses.
GPs charge hefty fees and require large minimum investment sizes. They are not set up to handle a lot of investors, nor provide the kind of reports that retail investors receive from mutual-fund companies or brokers. These hurdles mean only the largest LPs (sovereign wealth funds, big pension funds, wealthy endowments) can access them.
Only for instos
Even family offices or rich families can’t access GPs directly. Nor can mid-sized institutions. Especially for brand-name alternative fund managers, which can be very picky about whom they accept as customers.
Until recently the best these lower-tier institutions could do was invest in funds of funds, which amalgamate their accounts, charge an additional fee, and invest in alternative strategies on their behalf. To the GPs, the big funds of funds appear like just another big LP.
At no point have alternative investments been open to the middle classes. The best these folks can do is 1. live in a country with a robust pensions and funds industry and 2. work for an employer that has the means and the desire to invest some of their retirement money into alternatives.
A few companies such as iCapital and Moonfare offer platforms for family offices to access brand-name alternative managers. Digital platforms make it easy to aggregate hundreds or thousands of individual commitments. They can offer wealthy customers lower minimum thresholds and a simpler onboarding process. As far as the GPs are concerned, these platforms are just another LP.
Genesis of a fund
In Singapore, Chua is working with ADDX, a fintech that is using blockchain underpinnings to fractionalize fund units. This means in theory ADDX can aggregate retail investors, not just rich individuals. Singaporean regulations have yet to enable this, but Chua is optimistic that this will happen – which could make his new hedge fund, the Asia Genesis Macro Fund, the first to accept retail money.
But Chua is not a young gun looking to use technology to disrupt finance. He is about as old-school as they come, having run one of Singapore’s first big hedge funds in the 2000s.
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Chua ran the Asia Genesis Japan Macro Fund from 2000 to 2009. At its peak it managed $761 million of assets. He decided to close the fund on a high note, having generated an annualized return of 18.7 percent net of fees. He then ran his own family office.
The itch to run his own hedge fund returned, but it was delayed by tragedy. His wife developed cancer and he dedicated his time to taking care of her. She gave him her blessing for him to return to running money in 2019, before passing away.
He assembled an experienced partnership, including James Loh (formerly of DBS and Barclays) and Ronnie Wu (formerly of Penjing Asset Management) and set up the Asia Genesis Macro Fund. Covid struck, complicating fund-raising and the compliance process, but the fund has been operating since mid 2020 and now has about $200 million of assets under management.
Now the hedge fund has added Singapore-based fintech ADDX as an LP.
ADDX is using blockchain to fractionalize investments into bonds and funds. It is currently limited to serving accredited (wealthy) investors, but it is lobbying the Monetary Authority of Singapore to develop a framework to include retail investors. It is also in talks with the Central Provident Fund, which manages Singapore’s national pension system, about making products on the ADDX platform eligible to CPF account holders.
“It may take a long time before we get a lot of AUM from them, but if ADDX can source retail funds and CPF funds, along with their other investors, that would create a large investor base,” Chua said.
He says the idea came about from some of his other LPs.
“We share some high-profile shareholders with ADDX and Singapore is a small place,” Chua said. (Among ADDX’s backers are Singapore Exchange and Heliconia Capital, an arm of Temasek.) “I like the idea of democratizing investments and offering this opportunity to the mass affluent. We live in an unequal world. I’ve made a lot of money for rich people, and I’d be happy if now I can help the middle class.”
The difference between ADDX and a traditional fund of funds is that ADDX’s platform has the ability to aggregate small investors, with a minimum of only $20,000, versus the $1 million minimum that Asia Genesis requires from direct investors.
ADDX is waiving its own fees for users who use the platform to invest in Asia Genesis, in an attempt to kickstart demand. Once this promotion period ends, its normal fee would be 1 percent. That’s on top of Asia Genesis’s fees, which include a 1.5 percent annual management fee and a 20 percent performance fee. (Chua says his firm waives these fees if the fund closes the year at a loss.)
Chua and ADDX declined to quantify the volumes it is channeling to Asia Genesis so far, although it seems to be early days and experimental.
However, Chua believes platforms are going to become a fixture for how GPs raise outside capital. Singapore and Hong Kong are booming centers for wealth management, so the size of family money is now meaningful. Platforms eliminate the need for GPs to deal with individual investors.
But Chua thinks platforms will become important for larger clients too. Because they are digital and impersonal, there is no need for schmoozing to raise money. “We don’t do entertainment, which is usually important in the Asian business world,” Chua said. “But if platforms are trusted, they eliminate the need for us to build those client relationships. They shorten the onboarding process, and let us deal with investors very professionally.”
He is in talks with a Chinese asset manager listed on Nasdaq that is in the process of transforming its business into a platform representing the new crop of Chinese people with family offices in Singapore or elsewhere. Chua would like to work with it to access these investors without having to wine and dine them.
He declined to name the asset manager. Lufax, Noah and UpFintech (Tiger Brokers) are a few Chinese fintechs listed in the US.
Brave new world
Although Chua and his team have been able to rely on old contacts among Asian institutional investors to launch the new fund, he expects growth will have to come from new sources. Although he’s an old hand at running a hedge fund, he’s operating in a very different world.
The differences are both macro and technical.
His first fund debuted when overnight interest rates in the US were topping 20 percent, and then proceeded to fall all the way to zero while the Federal Reserve expanded the money supply any time there was a financial crisis somewhere. The Soviet Union had just collapsed and the West was shifting military budgets into private investment. China’s emergence as the world’s factory and the advent of digital technology both drove prices down and made companies more efficient.
Today those big trends are reversed: goods and services are more expensive, including those from China. Natural resources are also more expensive, as more emerging markets insist on metals and other commodities be processed onshore. The Russian invasion of Ukraine and US-China tensions are worsening both trends.
So while the short-term tactics that a fund like Asia Genesis pursues is the same, the fundamentals are different.
On the technical side, today the vast majority of trades are electronic and assisted by artificial intelligence. It’s a far cry from Chua’s roots of human research and executing through trusted sales traders. Chua says this also leads to more powerful swings in trading patterns, because many managers are following the same algorithms.
“Is there a chance for people like me to beat the machine?” he wondered. Obviously he believes the answer is yes. His strategy is to trade tactically (over a week) with a longer, more macro overlay (out to three months). He seeks trends and determines if it’s early or late, and then goes with it or bets against it. He sticks to liquid, listed instruments: equities, forex, interest rate swaps.
So far he has promising numbers after a slow start. The fund generated 3.9 percent net return (after fees) for the first seven months of 2020 and 3.2 percent in 2021. But in 2022, a tricky year for most managers, Asia Genesis returned 15.3 percent net of fees.