Israeli Hedge Fund Industry Small But Outperforming

May 21 2014 | 11:54am ET

The Israeli hedge fund industry is small but growing—and outperforming, according to a new report from Tzur Management.

Tzur approached 89 fund managers for its 2014 survey—65 currently manage a hedge fund while the remaining 24 operate through separately managed accounts, managing small amounts of capital while structuring hedge funds. Together, they represent a 50% increase in the number of active fund managers since the previous survey in 2011. In 2013 alone, the country saw 30 fund launches.

Of the 89 funds approached, 40 provided performance data, which has allowed Tzur to launch the Tzur Capital Management Index of Israeli hedge fund performance. That index shows that Israeli funds outperformed the hedge fund industry in 2011, 2012 and 2013 adding 6.7%, 13.3% and 17.0%, respectively.

The 89 funds contacted had combined assets under management of $2.66 billion as of December 31, 2013—up 33% in the past two years. Of that total, $2 billion was in hedge funds, the remainder in SMAs. The average manager had AUM of $30 million while the median AUM was $10 million, indicating many funds remain very small.

The average size of the funds launched in 2013, on the other hand, was $11 million, which Tzur said was higher than in the past and suggests the industry is beginning to grow out of the pattern of “small launches and slow asset ramp.”

The most common strategy, employed by 42% of Israeli hedge funds, was quantitative, followed by fundamental long/short (30%). In terms of AUM, however, fundamental long/short funds accounted for 46% while quantitative managers claimed 26%.

The bulk of Israeli hedge fund assets (55%) comes from private investors, but institutions have increased their share from 40% two years ago to 45% in the most recent survey. The bulk of that institutional money has gone to larger funds (defined as funds with over $30 million AUM).

Israeli funds still struggle to attract foreign investment—as in the previous survey, two-thirds of their assets come from Israeli investors. In fact, a lack of awareness of the Israeli hedge fund industry on the part of foreigners was listed as the first or second biggest worry of 30% of participants.

That said, 80% of respondents ranked an unfavorable Israeli tax ruling as the first or second most important issue facing the industry—and resulting in a lack of investment.

Interestingly, the majority of Israeli hedge fund managers has no investments in the Israeli markets—about 60% of total industry assets are invested outside of Israel, 40% in North America.

Said Tzur CEO and founder Yitz Raab in a statement: “Considering the impressive performance of Israeli hedge funds in recent years, it is no surprise that we are witnessing substantial growth both in assets under management and in the number of funds currently operating in Israel.”

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