Asian hedge funds: Comfortable with quant
Playing long/short in China
Credit? A niche strategy?
Good times for distressed debt
Riding volatility in Asia
“WHEN WE WERE marketing our Asia hedge fund five years ago,” reminisces a Shanghai-based hedge fund manager, “one head of a large US fund of hedge funds observed: ‘Shanghai, eh? I bet you get great sushi there’.”
Although the US manager’s knowledge of regional geography and cuisine was questionable, the comment was not entirely inapposite. Six years ago, most foreign investors in hedge funds – indeed in many other asset classes – regarded Japan as the only Asian economy suitable for investment.
These days it is an entirely different story. Hedge funds are finding opportunities across the region in China, India, Korea, Australia and southeast Asia, and the strategies they are implementing provide better returns for investors than those targeting the US and Europe [see chart]. This has resulted in a sharp rise in the number of Asian hedge funds, both within the region and outside it. However, like the industry in the US and Europe before it, the developing Asian hedge fund market is not without teething problems. Managers are realizing that the days of making a quick buck out of Asia are over. Scale, diversification of strategy and solid infrastructure are essential in order to attract capital and to deploy it.
The number of hedge funds with pure Asian strategies increased from 229 in 2001 to more than 800 in August 2006, and assets under management over the same period increased from about $18 billion to $124 billion, according to conservative estimates by hedge fund research firm Eurekahedge. The growing recognition of Asia’s potential is evidenced by the gradual shift in the geographical base of such funds. The number of home-grown funds has increased as Asian fund managers and investment bankers have left financial institutions at home or abroad to start up funds locally. In addition, foreign entrants wishing to get on the Asia hedge fund bandwagon have realized the importance of having a presence on the ground.
In 2001, under one-third of Asian hedge fund assets were being run from within Asia. Today half of the assets are managed from head offices within the region. “US- and Europe-based managers used to make the argument that, by being that far away, they could ‘distil the noise’ and make clearer decisions. But I think managers now admit that Mayfair and Fifth Avenue are not the best places from which to invest in Asia,” says Steve Diggle, managing partner at Artradis Fund Management in Singapore.
A presence in Asia is crucial to finding good investment opportunities, thereby attracting end investors. Many US hedge funds wanting exposure to Asia often struggle to find information. “US investors don’t really have a concept of what is going on in China and with Chinese companies traded on US stock exchanges,” says Ezra Marbach of Seekingalpha.com. “As a result, US hedge funds are relying on consultants to advise them on Chinese investments. But it is not as effective as being on the ground.” Marbach’s firm set up a website that provides information and analysis on Chinese stocks, including transcriptions of earnings conference calls of Chinese companies.
If resources allow, being on the ground is indeed better. Ed Mullen worked with the principals of Glenwood Financial Group (now part of Man Investments) before setting up his hedge fund, Emperor Greater China Fund, in mainland China several years ago. He runs a Greater China long/short strategy. He says: “There is, of course, the issue of time differences. Yes, there are arguably some strategies in China you could trade from Tokyo, London and the US from a night desk, but you are more likely to have an insight by being here. We employ a team of local professionals. We watch the local news in Mandarin, read the local papers, and talk with people in the shop we buy the papers from. There is no substitute for primary research, and you glean more information by being here.
“Plus, we’re here in China permanently and not on a whistle-stop tour where you’re up against a tight schedule and constantly thinking about the next meeting or your flight back home. We can pop in and see companies whenever it is convenient and necessary.” Tudor, Citadel, Cheyne, Och-Ziff, Perry, and Frontpoint have all set up offices in the region – not in all cases to manage separate Asian funds but sometimes to manage the Asian parts of larger portfolios.
What’s the best base?
Given the size and number of markets in Asia, choosing a base can be the first hurdle to overcome for managers wishing to set up shop. “You can’t club Asia together and treat it as one homogenous market. Asia is huge, both in its size and diversity. Therefore, you have to localize, and pick your spot,” says Harjit Bhatia, chairman and CEO of the Asia Pacific region at global alternative investment firm Ritchie Capital, which has approximately $2.8 billion assets under management. “It’s not like Europe, where, for example, you could choose to operate from Paris, London or Brussels and still do pretty much the same business from any of those locations.”
Although Tokyo and Sydney are natural choices for funds looking respectively for Japanese and Australian investments, strategies in other areas of Asia tend to be split between Hong Kong and Singapore. According to the Monetary Authority of Singapore and Hong Kong’s Securities and Futures Commission, of the estimated 450 hedge funds based in Asia, about 150 are based in Hong Kong and more than 100 in Singapore. According to managers, the decision to base in one or the other of these jurisdictions is governed predominantly by lifestyle choice, regulatory environment, cost and level of emphasis on Chinese investments.