Hedge Fund Spies Asian Markets.

Byline:Â Gerelyn Terzo

The Asia Pacific region is morphing into the next frontier in the alternative investment world. Investment banks, law firms and asset management firms of various sizes are flocking to the region to capitalize on what they deem a nascent opportunity for institutional investors, such as pension funds, and wealthy individuals, as opposed to the U.S. and Europe, where the alternative investment playing field is more mature.

“Demand for investment products is really growing by leaps and bounds within the parameters of the Asia Pacific region,” said James Rice, head of the international group at K2 Advisors. “Funds-of-hedge funds occupy a great space for new entrants into the marketplace for alternative investments.”

K2 Advisors, which is based in Stamford, Conn., and has some $5 billion under management, is one of a number of firms extending their reach into Asia Pacific, including BlackRock, which recently merged with Merrill Lynch Investment Managers and is reportedly planning an Asian fund of funds and an expansion into Tokyo. BlackRock did not return calls for comment.

Similarly, boutique investment bank Thomas Weisel Partners hopes to uncover a host of investment banking opportunities in India.

Thomas Weisel, chairman and CEO of the firm, told Investment Dealers’ Digest-IMW’s sister publication-at a Keefe, Bruyette & Woods conference in New York on Nov. 1 that his firm plans to launch a private equity fund-of-funds in India that will aim for $300 million to $400 million, but not before year’s end.

Weisel plans other aggressive initiatives in the region. On the research front, the company intends to expand its coverage in India from a current roster of 70 companies to 100 by the first quarter of 2007. Weisel is hopeful the relationships that the firm is in the process of establishing will lead to additional banking opportunities.

“We’re talking to several India-based companies that want to do an offering and list in the U.S.,” Weisel said at the conference.

Weisel hopes to establish a competitive investment banking presence in China, where some $60 billion in foreign direct investment has poured in of late.

“We’re looking at joint venture opportunities in China,” he said. “Unlike our competition, which has taken the more expensive route [and established new offices in the region], we chose not to do that.”

Fulbright & Jaworski is also expanding in Asia, specifically into China, where it opened a Beijing office on Nov. 2. Jeffrey Blount, an M&A attorney at the law firm who has been in the firm’s Hong Kong office since the 1990s, was tapped as chief representative and partner in charge of the Beijing office. He said that since China began letting in foreign investments, a lot of private equity capital has been chasing projects in the country.

“The traditional deal structure in China until three or four years ago was cash equity related. It was a fairly simplistic way of acquiring a business or a company in China,” Blount said. “Now, with the increasing liquidity in the Chinese markets, and cash flowing in from private equity and hedge fund money, it creates new opportunities for multinational companies to get into the market in China using innovative structures.”

K2’s Asian Push

K2 also has ambitious plans for Asia, and intends to ramp up its research capabilities and sales team prior to launching any new fund-of-hedge funds in the region.

K2 currently manages eight funds-of-hedge funds with various levels of return and volatility, all of which have different dates of inception. Kelsey Biggers, managing director of risk management at K2, said the firm clings to a straightforward strategy, which is to deliver equity-like returns with bond-like volatility.

“Our largest and longest running fund, Master Fund, has returned an annualized 13.61% with volatility on average around 3.60%,” said Biggers. “That fund has generally had an allocation of 60% to long/short equity and 40% to low volatility strategies.”

K2 funds are denominated in U.S. dollars. Eventually, however, the firm plans to launch vehicles that will invest in local Asian funds. Rice, a corporate governance specialist, was tapped from Citigroup Japan to round out a team of four in K2’s Tokyo office and to spearhead a push into Asia Pacific and Europe.

In addition to courting new talent, Rice is in discussions with potential clients, ranging from pension funds to wealthy individuals in the region.

Moreover, Rice is in the process of putting research analysts and sales people alike on the ground in Asia Pacific and in Europe; teams that will look into both onshore and offshore investment opportunities. He will use the existing Tokyo and London offices as springboards to the expansion. And Rice is not counting out his predecessor firm.

“Citigroup has a pool of very talented people, and they would certainly be on my radar screen,” he admitted.

Currently, Rice is looking in Asia, particularly in Hong Kong and Singapore, for a central regional office.

Gerelyn Terzo is a staff writer for Investment Dealers’ Digest.

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