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Portfolio > Alternative Investments > Hedge Funds

Morgan Stanley Plans Aussie Expansion

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SYDNEY, Australia (–Morgan Stanley is to establish a prime brokerage business in Australia, national daily The Australian has reported. While the U.S. banking giant already has a strong position in the Australian market, according to the article, it has hitherto serviced clients there from bases in Tokyo or Hong Kong.

It is probably a shrewd move. According to Axiss Australia, the financial services division of government agency Invest Australia, as of June 30, 2005, “[h]edge fund managers located in Australia control A$22.4 billion (US$17 billion) in assets, more than Hong Kong, Japan and Singapore put together,” according to data provided by research firm LCA publications.

When funds of hedge funds are included, the total size of Australia’s hedge fund industry reaches A$35.4 billion, again according to LCA figures, although this number makes no adjustments for double counting. According to the Axiss report, “The Hedge Funds Industry in Australia” (Data File 2006), available data shows that in the two years between June 2003 and June 2005, total assets under management of Australia’s single hedge fund managers and funds of funds tripled.

While Morgan Stanley is already Australia’s most important prime brokerage, servicing 35% of Australia’s hedge fund assets according to LCA, establishing a prime brokerage business there may be designed to head off competition from rivals Merrill Lynch, Fortis Clearing and UBS, which already have solid Australia-based teams.

One surprising aspect of the Australian market is the size of the high net worth and retail investor base there. These account for 65% of total hedge fund investments, with 20% coming from Australian pension funds and the remaining 15% from offshore institutional investors. This notwithstanding the fact that Australia has only about one-tenth the number of high-net-worth individuals as Japan, according to the Merrill Lynch/Cap Gemini World Wealth Report of 2005.

As the Axiss research notes, the consolidation of the hedge fund industry in Australia has been and continues to be bolstered by the low level of startup and running costs. According to data gathered by regional Ernst & Young offices, startup costs (all in U.S. dollars) range from $81,000 to $195,000, against $54,000 to $117,000 in Singapore, $60,000 to $305,000 in Hong Kong and $190,000 to $530,000 in Japan. But the real differences are seen in annual recurring running costs. In Australia these range from $162,000 to $340,000, compared to $211,900 to $318,900 in Singapore; $195,000 to $612,000 in Hong Kong; and $357,000 to $880,000 in Japan.

The above factors indicate that Australia’s hedge fund industry will continue to grow at a strong pace. Indeed, the article in The Australian, citing LCA research, said the industry is projected to grow to A$166 billion by 2015. Even if this figure may seem ambitious, it will be no surprise if other service providers follow Morgan Stanley down under.

Contact Bob Keane with questions or comments at [email protected].


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