Israeli hedge fund index unveiled
Tzur Management, a Tel Aviv-based fund administrator and Gilboa, a fund of hedge funds, have launched an index tracking the performance of Israeli hedge funds.
The Tzur Gilboa Israeli Hedge Fund Index (TGI) will provide monthly data on any open-ended funds registered, managed or significantly invested in Israel. There is a minimum asset threshold of NIS 10 million to be included on the index. Calculation of TGI will be conducted by taking an equally-weighted average of all funds that meet the eligibility criteria.
TGI will provide performance data for 49 Israeli hedge funds dating back to 2007. According to the TGI Index, Israeli hedge funds have generated returns of 6.8% year-to-date 2014, whereas the average global hedge fund has delivered gains of 3.43%. Israeli managers have delivered strong performance over the last two years, with gains of 15% and 19% respectively for 2012 and 2013.
A survey published by Tzur Management in May 2014 revealed Israeli hedge funds had grown their assets by 33% to $2.66 billion since 2012. The average hedge fund in Israel controlled approximately $30 million in Assets under Management (AuM) although the median AuM was just $10 million. The number of Israeli-based hedge funds also increased by 50% since 2011 and presently stands at 89. The survey highlighted there were 30 new launches in 2013 with an average launch size of $11 million, a figure higher than in previous years.
Despite this growth, the Israeli hedge fund industry remains embryonic, which has not made it easy to attract capital from domestic and foreign institutional investors. Forty-five per-cent of capital controlled by Israeli hedge funds is derived from institutions compared with 55% from private investors, said the survey. The majority of this money is allocated by Israeli high net worth individuals with foreign investors accounting for just 20% of capital invested in funds managing in excess of $30 million. Meanwhile, Israeli investors were only permitted to invest capital abroad from 2000, and many started allocating into hedge funds in 2006 and 2007 only to get burnt by the financial crisis, or worse Bernard Madoff. These negative experiences have also made it harder for Israeli managers to raise money.
The biggest hindrance for managers to gathering assets is Israeli tax law with 80% of respondents to the Tzur Management survey stating it was one of their biggest stumbling blocks. Israeli investors are subject to a capital gains tax of 30% if they allocate into hedge funds instead of the standard 25% if they invest in all other investment vehicles. This is irrespective as to whether the manager is domiciled within Israel or in an offshore jurisdiction such as the Cayman Islands.
Furthermore, domestic investors are taxed at the end of each calendar year even if there have been no realised gains. The lack of safe-harbour rules also dis-incentivises foreign investors from putting money to work in Israeli hedge funds. The bulk of hedge funds are also not regulated by the Israel Securities Authority (ISA) and this lack of regulatory oversight is an issue for some institutional investors. The Israeli hedge fund industry’s lack of scale means this is unlikely to change anytime soon.
Another problem facing Israeli-focused hedge funds is the scarcity of prime brokers operating within Israel. There is no official prime brokerage industry per say although large-scale domestic banks can offer execution, securities lending, margin and reporting to clients trading Israeli securities.