Nov. 6 (Bloomberg) -- After a decade running Sydney-based hedge fund Commodity Strategies Ltd., founder Rob Holroyd is planning a move to New York or Switzerland in search of cash.

Investors have increased due-diligence after Bernard Madoff’s Ponzi scheme, and scrutiny is likely to be heightened following hedge-fund manager Raj Rajaratnam’s insider trading case, Holroyd said. That’s hampering his bid to boost assets to $2 billion from about $170 million as overseas investors aren’t willing to spend the time and money needed to complete reviews of Australian-based funds, he said in an interview from New York.

“People keep saying, ‘you must be crazy if you think you can run your business from Sydney,’” he said. “This whole Madoff thing has really scared the living daylights out of people. The whole level of ‘we need to keep an eye on these guys if we’re allocating them money’ has gone up significantly.”

While Australia weathered the financial crisis better than most developed economies, its hedge fund industry didn’t. Assets managed by the nation’s hedge funds plunged 43 percent from a 2007 peak to August, according to data from industry researcher Eurekahedge Pte, compared with a 26 percent drop globally.

Investors looking at Asia-Pacific managers tend to head to Singapore, which has grown its industry from near zero in 1997, or Hong Kong, where most China-focused funds are based, Eurekahedge said in its September report. Meanwhile Australia, among the region’s first hedge-fund centers, is “a little far off, thus less accessible and more expensive to reach,” it said.

The decision to bypass Australia comes even as its managers outperform this year. Single funds returned 17.6 percent in the nine months to September, according to Australian Fund Monitors, compared with the Eurekahedge Fund Index’s 16 percent advance.

‘Not Recovered’

“We are seeing investors traveling to Asia again this fall, though the numbers traveling onto Australia have not recovered by the same level as yet,” said James Fallon, director, financing sales Asia-Pacific at Bank of America Merrill Lynch in Hong Kong.

Platypus Capital Management in July said it was liquidating its long-short Asian and Australian hedge funds, citing difficulties attracting capital in a “post-Madoff world.” The Sydney-based firm, which had about $42 million in assets, said it would return funds to investors because it didn’t have a “viable size in the industry as it currently exists.”

‘Tyranny of Distance’

“There is still and will always be a reluctance to invest in Australian managers while Australia remains an eight hour flight from Singapore, a 10 hour flight from Hong Kong and a 22 hour flight from New York or from Europe,” said Chris Gosselin, chief executive officer of Sydney-based industry researcher Australian Fund Monitors. “Australia always has a tyranny of distance problem.”

36 South Investment Managers Ltd., whose Black Swan Fund more than tripled in 2008, moved to London from Auckland this year to boost assets under management after investors overlooked the manager because of its location, co-founder Jerry Haworth said in March.

Fortitude Capital’s Absolute Return Trust tumbled to around A$85 million ($77 million) from about A$180 million in October last year after redemptions, including from investors who lost money with Madoff, founder and Managing Director John Corr said in an interview in September.

Madoff pleaded guilty in March and is serving a 150-year prison term for using money from new investors to pay earlier ones in what’s thought to be the biggest Ponzi scheme in U.S. history. Rajaratnam, the founder of New York-based Galleon Group, was arrested on Oct. 16 in what U.S. prosecutors called the biggest insider-trading ring targeting a hedge fund.

Diversification

At Platinum Asset Management, Australia’s biggest hedge fund company, the portion of overseas investments has dropped to about 9 percent of the more than A$16 billion managed as of Sept. 30. That’s down from over 20 percent two years ago.

Platinum suffered by staying open when other funds around the world halted redemptions at the end of last year, said Liz Norman, the company’s Sydney-based investor services manager. The firm, which counted George Soros among its early investors, has two U.S. dollar funds distributed through Optima Fund Management in New York.

“We like the diversification that comes with having money sourced from both Australia and abroad,” Norman said.

Bennelong Funds Management, which manages more than A$870 million, said the heightened scrutiny can help established firms attract new money.

“It raises barriers to entry,” Chief Executive Officer Jarrod Brown said. “You can’t just buy a couple of Bloomberg screens and a desk and set up a hedge fund, there has to be significantly more substance behind it to attract any level of sophisticated investor.”

Shorting Ban

Bennelong has raised money from local pension funds, high- net-worth investors and local fund of funds in the past year, he said.

The nation’s industry wasn’t helped by the regulator. The Australian Securities & Investments Commission banned the short- selling of all stocks in September 2008 as part of international efforts to contain stock market declines in the aftermath of Lehman Brothers Holdings Inc.’s collapse.

Holroyd, 50, plans to bring three staff with him upon moving, and will leave the fund’s programmers and a marketing office in Sydney, he said. Commodity Strategies, which uses fully automated models, has an active long-only commodity futures fund managing about $50 million and a long-short offering with about $120 million.

If current discussions with investors turn into allocations, Commodity Strategies may manage a further $200 million to $300 million “reasonably quickly,” Holroyd said, without naming investors or specifying a timeframe.

“It makes it so much easier when you are in the swim of things,” he said. “We’re hoping that within the next six or nine months we’ll be moving out of Sydney and on to hopefully greener pastures.”

To contact the reporter on this story: Malcolm Scott in Sydney at Mscott23@bloomberg.net

Last Updated: November 5, 2009 08:00 EST