MONEY. Other people's

Transcription

1 Success ingredient Simon Humphries, Finance Director, Dymon Asia Capital Other people's MONEY Simon Humphries, Finance Director of Dymon Asia Capital, one of the region s largest hedge funds, tells George W. Russell about running the finance operations of an alternative asset management business amid a tighter regulatory environment for portfolio managers Photography by Zurina Bryant I n the 1987 documentary Trader, legendary hedge fund manager Paul Tudor Jones is seen conducting multimillion dollar currency and futures deals from his Virginia estate wearing workout gear and using nothing more than a phone and a desktop computer. That was in the heady days just before the 1987 Wall Street crash ended a long-running bull market. One of the more remarkable aspects of Jones s operation, Tudor Investment Corporation, was its leanness: Jones, his colleague Peter Borish (who predicted the crash), a floor 34 trader and a person who answered the phones. Today, that kind of seat-of-the-pants hedge fund operation wouldn t fly, says Simon Humphries, Finance Director of Dymon Asia Capital and a Hong Kong Institute of CPAs member. That model is pretty much outdated now, he says. Investors are entrusting you with substantial amounts of money and they need to know that you have proper resources to take care of that money. Dymon Asia Capital, an investment management company with about US$3.4 billion in assets, focuses on macro investment, which tracks macroeconomic trends in the

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3 Success ingredient currency, stock, bond and commodity markets of various countries. Its flagship Dymon Asia Macro Fund hit the headlines in 2011 when it returned more than 20 percent to investors, after fees, becoming one of the best-performing Asia-Pacific hedge funds. Given stricter regulation and more stringent operational due diligence standards by investors, modern hedge funds have established complex back-office and finance functions such as the one Humphries leads. The things that accountants look for in all control environments are relevant, so segregation of duties, second checking, review and approval systems are all important, and with that, you need scale and you need people. Humphries says a sizeable portion of the floor which Dymon occupies in Millenia Tower a 41-storey building that forms the centrepiece of Singapore s Marina Centre development is dedicated to the fund s infrastructure unit. We ve got legal people, we ve got compliance people, we ve got teams doing reconciliation and validating the trades being put through by the portfolio management team. That attention to back-office detail, says Humphries, is helping Asia-Pacific hedge funds achieve world-class status. I think Asia is catching up to the United States and Europe and those markets are more saturated, he says. Some of the opportunities are in Asia Pacific as a fast growing region as well and I think that Asian fund managers are well placed to grow. High-stakes sector Paul Tudor Jones helped seed Dymon in 2008 with an injection of US$100 million, and Dymon s founder Danny Yong has attributed his success to emulation of what he described as Jones s methods of fairness and excellence. In the hedge fund business, the basic revenue stream is twofold. In simple terms, you have a management fee, which is a percentage of the money you have invested, and a performance fee, which is when you get to share in a percentage of the profits, Humphries explains. The management fee should be enough to cover the rent and basic salaries and the performance fee is the potential for the employees and the owners to share in the surplus profits of the business. Humphries notes that the financial barriers to launching a hedge fund have risen, largely due to a higher regulatory burden. The financial crisis that began in 2008 led to heightened scrutiny of what money managers are doing, he says. There is a steady stream of new regulation coming from all the locations where we have operations or conduct business and it is critical that we keep on top of it. A further complication is extra-territorial regulation, he adds, citing the European Union s Alternative Investment Fund Managers Directive and the Foreign Account Tax Compliance Act enacted in the United States as two recent examples. There is no end to the introduction of new and more complex regulation impacting the financial 36

4 A PLUS services industry. Humphries says the higher compliance cost means hedge funds require a higher level of assets under management to make a profit. The consultants that advise hedge funds say that you need a minimum of US$100 million and more like US$250 million. On top of that is the rising cost of human capital in a competitive sector. You can only be successful if you make returns and for that you need people, says Humphries. It s not just regulators that are keeping a close eye on hedge fund management. Humphries adds, As part of their own due diligence monitoring requirements, institutional investors often visit us and part of our daily work is to meet with them to explain how we take care of the assets and supervise the activities of the portfolio management team. Young (now EY), didn t grow up in a business family, although a grandfather was a chartered accountant in the United Kingdom. His parents ran a livery operation, providing stabling and facilities for horse owners, on Guernsey, one of the Channel Islands off the French coast. The financial crisis that began in 2008 led to heightened scrutiny of what money managers are doing. Stable profession Humphries, a former auditor with Ernst & He could have followed in his parents footsteps but chose a different path. I had an opportunity to take over the yard but I didn t have the same passion for it that they did and had a nagging wanderlust to see more of the world, he says. After graduating in business from the University of Hertfordshire the former Hatfield Polytechnic about 30 kilometres north of London Humphries joined EY as a trainee accountant and rose to senior manager in a 10-year career with the firm. I later worked for the Guernsey office, focusing on the audits of offshore investment funds, captive insurance companies, trust companies and some private banks. Accountants were in high demand on the island, as the financial sector comprised about 50 percent of the gross domestic product of Guernsey, which has a population of around 65,000. There just weren t enough local accountants to do that work, so they imported people, he recalls. There were many Scottish and Irish accountants, and as their economy improved there were more South African and New Zealand, and then you started to get people from around Europe. Over time, Humphries became increas- Hedge funds on a roll The hedge fund sector has never been bigger. Total global assets under management reached a record US$2.82 trillion at the end of September, according to data provider Hedge Fund Research. Of that, the Asia-Pacific region accounted for a record US$117.4 billion in the third quarter of 2014, the Chicago-based company reported, commenting that the increasing assets under management reflected rising confidence in the region's hedge-fund managers and in Asia-Pacific economic growth. Hedge funds pool investor money and utilize a wide range of investment assets and techniques to maximize returns. Hedge fund investors are willing to take a higher risk in the hope of a higher return, and hedge fund managers deploy their skills to reduce risk without lowering investment income the hedge aspect. Fund managers invest in currencies, futures and complex derivatives, and long positions in equities are also popular. The recently listed Chinese e-commerce company Alibaba, for example, was added to many portfolios in the third quarter. While Hong Kong and Singapore, the two Asian finance centres, compete as locations for asset managers, industry observers say they offer similar environments in terms of tax and regulation. Certainly, Singapore looks to Hong Kong to see what they can learn from its model and I think people in Hong Kong are interested to see what Singapore is doing and they benchmark each other, says Simon Humphries, Finance Director of Singapore-based Dymon Asia Capital and a Hong Kong Institute of CPAs member. Asia-Pacific hedge funds have struggled with volatile markets this year but have generally outperformed underlying regional markets. Humphries notes that one issue for new entrants is the increasing cost of compliance. In May, Singapore government-owned Temasek Holdings committed $500 million to a venture under which Dymon would provide hedge fund seeding capital and manage all non-investment functions for new hedge fund managers. We [would] provide the operational, risk management, legal, compliance and accounting aspects so the fund managers could focus on the investing activity. In July, Dymon partnered with former SAC Capital Portfolio Manager Carl Vine to provide seed capital and operational infrastructure for a global long and short equity hedge fund with an Asia focus. 37

5 A PLUS ingly focused on hedge and private equity funds and their associated management companies and became fascinated by the sector. In 2007, I left EY to join a start-up hedge fund manager based in Hong Kong with responsibility for financial control, he says. This was a very exciting opportunity to essentially be part of something from the very beginning. The Asia-Pacific markets were riding high but Humphries came quickly back down to earth with the downturn that began the following year. It was a fantastic time for my personal development and I felt like I went through a full economic cycle, he says. After five years, he left to join Dymon, whose founders he had known. Having worked for a start-up hedge fund manager, it is now exciting to see a similar business that, while still being entrepreneurial, is taking risk-managed steps to grow further. Developing markets Dymon was a small private company headquartered in Singapore that had been successful and grown fast, he says. When I joined, the company was investing in back and middle office infrastructure and becoming a more institutionalized business. Although Dymon has a Hong Kong office, Humphries job required that he move to its Singapore headquarters. I was attracted to the opportunity to live in a new location and to work for a fast growing company, particularly because the head office was located in Singapore rather than London or New York as is more typical for a large hedge fund manager. Hong Kong and Singapore are two of the major Asia-Pacific hedge fund management centres and have largely similar regulatory and business environments. I would say that Singapore has more tailored incentives that Hong Kong doesn t have yet, says Humphries. One of them is the Financial Sector Incentive Fund Management scheme [under which] you can get an attractive tax rate. Singapore, he adds, tends to attract financial professionals interested in the wider region, especially the Southeast Asian markets, while Hong Kong is more of a specific China focus. In terms of the products I see it [Hong Kong] as more of a concentration towards long and short equity positions, while here in Singapore there s more of a focus on macro currency and interest rate trading. Humphries is optimistic about the firm s future. Dymon has launched a number of new products in recent years and is well placed to continue to grow, he forecasts. I see continued strong interest from institutional investors for high-quality managers and good prospects for the industry as a whole. While he says that Institute members make fine portfolio managers, Humphries prefers to utilize his eye for detail, time management and problem-solving skills honed by his CPA experiences in the all-important back office. Perhaps even Paul Tudor Jones would be impressed. I would say that Singapore has more tailored incentives that Hong Kong doesn t have yet. 39