Tal Keinan, an Israelifund manager, was ready for the question hes always asked when he met with investors inNew Yorkin October: Why put your money with a manager whose countryIranhas threatened to obliterate.We tell them if the Iranians attack, the worst thing that can happen is you lose yourmoney managernot your money, Keinan, chief executive officer of Tel Aviv-basedKCPS & Company, which oversees $1 billion in assets, said in an interview on Oct. 14. The notion is trade global markets with global assets and clients, but just do it fromIsraelbecause of the concentration of talent here.
The country is becoming a magnet for hedge fund managers as lower operating costs, the worlds highest number of Ph.D.s and hi-tech startups per capita overshadow concern that Israel may be attacked by missiles from Tehran. The number of funds has grown to 60 overseeing about $2 billion from 13 in 2006, according to a survey of the local industry published in July by Tzur Management. Israel may be on track to replicate the growth that propelledSingapores industry from fewer than 20 managers in 2001 to 320 overseeing $48 billion in 2009, Yitz Raab, founder and managing partner of the Tel Aviv-based fund administration company, said in an interview on Nov. 11.
Brevan Howard Asset Management LLP, Europes second-biggest hedge fund, opened an office inTel Avivat the end of 2005. Sphera Funds Management, the countrys largest hedge fund, raised money in 2007 to start a global health-care fund which now has about $235 million under management.WorldQuant LLC, based inOld Greenwich,Connecticut, has a research and development team in Israel.
Nuclear Weapons
Since Iranian PresidentMahmoud Ahmadinejadsaid in 2005 Israel should be wiped off the map, Israeli leaders have been saying time is running out to stop the Persian country from developingnuclear weapons. There is a 33 percent chance Israel or the U.S. will launch a military strike against Irans nuclear sites by the end of 2013, according to odds compiled by Intrade.com, as of Dec. 25.
Israel, which was nicknamed Start-Up Nation in the 2009 book byDan SenorandSaul Singer, has 54 companies traded on the Nasdaq Stock Market, the most of any country outside the U.S. afterChina. The nation is also home to more startup firms per capita than the U.S., and the same people who drove that development in Israels technology industry are in place to develop quantitative models for hedge funds, Keinan said.
Unique Locations
In order to raise capital in unique locations, you have to offer something that is a lot stronger than what the average hedge fund offers, Don Steinbrugge, the managing partner of Agecroft Partners LLC, a Richmond, Virginia-based firm that advises hedge funds and investors, said in a telephone interview on Sept. 20.
While globalhedge fundsare cutting trading costs amid a decline in volumes and deteriorating performance for the $2.1 trillion industry, available talent and lower operating costs are attracting investors to Israel.
Israel has the highest percentage in the world of engineers in the workforce and the highest ratios of university degrees and academic publications per capita,according to the Technion- Israel Institute of Technology. About 135 people per 10,000 have a Ph.D., according to theFinance Ministry, 1.3 times the average of the Organization for Economic Co-operation and Development.
Twojob openingsposted on Weizmann Institute of Sciences website by Brevan Howard (Israel) Ltd. seek a quantitative analyst and developer. The posts ask for strong mathematical and problem-solving skills. Another posting on the Haifa-based Technionswebsiteby WorldQuant Research (Israel) Ltd. seeks engineering, math, computers and physics majors. An official forBrevan Howard, who asked not to be identified because of company policy, declined to comment.
Strong Base
We have the advantage of small size in a place with a strong base of key global opinion leaders and Ph.D. professionals and it is very easy for us to stay ahead of the curve, Ori Hershkovitz, a partner at hedge fund Sphera, said by phone on Dec. 19 from Tel Aviv.
Israels cheaper prices also are a lure, said Hershkovitz. The total office occupancy cost in Tel Aviv is $56.25 a square meter, less than the 82.30 pounds ($134) a square meter in Londons City area, according to a Julyreportfrom CBRE Global Research and Consulting. In New Yorks midtown,office spacecosts $114 a square foot.
The average annual starting salary for a Tel Aviv-area MBA graduate is the equivalent of $78,300, according to a survey by IsraelsInterdisciplinary Center Herzylia. The comparable starting salary in the U.S. is $169,000 and 106,000 pounds in London, according to a 2011 salary survey conducted by eFinancialCareers.
Still Small
By assets under management, Israels hedge fund industry is still small, eclipsed by the S$59 billion ($48 billion) overseen by funds in Singapore by the end of 2009, according to the Monetary Authority of Singapore.
I dont see any sort of strategy or road map coming from anyone above saying we want to build the financial markets, Spheras Chief Executive Officer Amir Ayalon said on Oct. 16 from the companys Tel Aviv offices. The natural barriers and challenges are capital market size, regulatory constraints and taxes.
Israels $134 billion stock market represents just 0.3 percent of global market capitalization, data compiled by Bloomberg show.
More than 60 percent of the capital managed by Israeli hedge funds comes from private investors, with the remaining 40 percent originating from primarily Israel-based institutional investors, the Tzur survey shows.
Outperforming
Israeli hedge funds are outperforming peers this year with nine returning an average of 12.2 percent while the HFRX Global Hedge Fund Index added 3.3 percent. Eurekahedge Pte., a Singapore-based compiler of hedge-fund data, said in an e-mailed statement that five Israeli funds it tracks returned an average of 13 percent since 2005.
The global financial collapse in 2008 benefited the industry, leading some executives to give up living in New York and London for Israel. One-third of Israeli-based hedge fund managers have previously worked for international institutions, includingUBS Global Asset Management Holding Ltd. (UBS)andGoldman Sachs Group Inc. (GS), according to Tzurs survey.
Israel doesnt have any natural resources -- its all about brain power, said Keinan. There is nothing to keep the hedge fund industry from expanding. It is happening.
By Bloomberg
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