Israeli hedge fund industry enjoys massive growth
Research by Tzur Management, an Israeli platform and fund administrator, revealed there are now 60 hedge funds operating in Israel managing around $2 billion in Assets under Management (AuM), representing roughly 0.2% of the $2 trillion global AuM. AuM has increased over the last few years, having grown by 30% in 2011 and 10% in the first quarter of 2012. Nevertheless, most managers remain nimble running sub-$100 million funds.
Yitz Raab, founder and managing partner of Tzur Management in Tel Aviv, was optimistic this growth would continue. “It was very difficult until recently to run an investment fund in Israel partly because of the strict rules on foreign investment. The taxation regime has been amended making it easier for private investors and institutional investors, especially those outside of Israel, to allocate to domestic funds,” he said.
The national regulator, the Israel Securities Authority, historically imposed prohibitive restrictions making it near impossible for a domestic hedge fund industry to flourish. Even Haaretz, a left-leaning Israeli daily, described this approach towards hedge funds as “blunt and self-defeating.”
“The regulators have made it easier for hedge funds to operate in Israel, and I do expect further growth and development in the domestic hedge fund industry. However, the global trend is to impose more regulation and I anticipate Israel won’t be the exception although I hope the rules will not prevent the industry from flourishing,” said Raab.
The majority of investors into Israeli funds, said Raab, were domestic high net worth individuals and family offices. However, this appeared to be changing. “The $50 million plus managers have raised the majority of their capital from Israeli investors. Interestingly, the sub-$50 million managers seem to be attracting a lot more foreign capital. Roughly two thirds of capital in these managers is from outside Israel, primarily from North America,” he added.
Like many emerging hedge fund markets, long/short equity is the dominant strategy in the region accounting for 43% of AuM. This is followed by quantitative strategies which have doubled since 2008 and now comprise 23% of AuM.
“I believe strategies will become more esoteric in time. We have already seen a substantial growth in quant-based strategies, which is natural strength of Israel. The country is renowned for having a strong high-tech industry and there is a talent flowing into hedge funds. I also believe strategies which utilise mathematic trading models such as global macro or currency will also become more prolific,” said Raab.
The majority of these hedge funds, however, have no direct exposure to Israeli markets. “The Israeli markets are developed and the lack of exposure hedge funds have to domestic markets is not down to regulation or restrictions around shorting. The market is limited in size and there are capacity constraints in the stock and bond markets, which explains why so many funds are focused on international markets,” highlighted Raab.
Israeli hedge funds have also consistently outperformed industry benchmarks since the financial crisis. In 2011, Israeli hedge funds gained 7.9% whereas the HFRX Global Hedge Fund Index fell 8.9%. Despite this solid performance, the majority of outsiders remain oblivious to the Israeli hedge fund market. This shortcoming is acknowledged by Israeli respondents – 80% recognised most foreign investors were unaware there was a hedge fund industry in the country.
The lack of domestic service providers could also be a hindrance to the industry’s development in the region. Very few, if any, major prime brokers or fund administrators have operations in Israel.
“The majority of Israeli funds operating on international markets use international service providers, and I certainly do not believe the lack of service providers in Israel itself is holding the industry back. However, many managers have expressed mixed feelings about the quality of service they are receiving from international prime brokers. Many small funds would like to see more prime brokerage activity in the region although larger managers appear to be content with the service they receive,” commented Raab.