Asia-Pacific funds still account for just 7% of global total, writes Neil Wilson.
The growth of Asia – and particularly of China and India – continues to be a big factor driving world markets. So, not surprisingly, the growth rate of hedge funds in the region is also gathering pace. As we have argued before in this column, there are lots of good managers in the Asia-Pacific region, and investors increasingly seem to be finding them.
Yet all of this is not so immediately apparent from the regional statistics on hedge fund assets. According to our regular cycle of six-monthly surveys in AsiaHedge, asset growth in Asia-Pacific hedge funds has continued to be robust over the past 18 months – with the aggregate rising from about $130 billion in mid-2006 to $147 billion by year-end, and again to $167 billion by mid-2007.
These numbers are impressive, but they do not indicate any increase in the overall proportion of global hedge fund assets. Given the dramatic growth that has also continued in Europe and the US – taking global hedge fund assets to about $2.48 trillion overall by mid-year – Asia-Pacific funds still account for barely 7% of the global total, about the same proportion as last year.
It is worth pointing out therefore that these aggregate statistics mask some contrasting trends beneath the surface. In fact, the growth rate in Asia has been faster than elsewhere if you exclude one Asian market – Japan. Again as noted before, disappointing performance has been a problem for many Japan long/short equity managers for a couple of years now – and this was reflected in significant net outflows from those funds during the first half of 2007.
Historically, Japan long/short has been the dominant strategy in the Asia-Pacific – reflecting Japan’s status as the world’s second-largest economy – and it used to account for close to 50% of all the assets in Asia-Pacific funds. But the net outflows during 2007 – reducing assets in Japanese equity funds by about 20% from $48 billion last December to $38 billion by July – have been dramatic, with the result that pure Japan funds now account for less than 25% of the regional total.
At the same time, the growth in ex-Japan strategies has been similarly dramatic. Assets in pan-Asia ex-Japan grew from $16.9 billion to $24.4 billion during the first half of 2007. Assets in both pure Chinese equity funds and Indian equity funds both almost doubled over the same period – to $10.6 billion and $4.5 billion respectively. (And the amount in pan-regional strategies – Asia including Japan – also grew sharply, from about $21 billion to more than $30 billion).
These changing patterns were well reflected at our recent AsiaHedge awards in Hong Kong, where the fund of the year prize was taken by Yang Liu, manager of the Atlantis China Fortune fund. Given the growth of equity markets in India and China, simply to compete for these awards, managers had to deliver triple-digit-plus returns over the previous 12 months, which Yang duly did with a 121% return on a strong Sharpe ratio of 4.94.
The first ever female manager to take a fund of the year award at any of our events globally, Yang also delivered a typically feisty acceptance speech. Among other things, she noted that "greater China" – led by Hong Kong plus Taiwan and onshore mainland China markets – this year superseded Japan as the biggest equity market by capitalization in Asia. She was also not slow to point out that her $800 million hedge fund – not surprisingly in such a rampant bull market – had not done so well this year as the $5 billion more she also runs in long-only funds.
It’s all a far cry from the view of many managers only two years ago. Back then, at our annual AsiaHedge forum, many were still lamenting the poor standards of corporate governance in China (and India too), which had stifled performance in the previous five years. At this year’s forum, not many were commenting on corporate governance now – although at least one, Sanjiv Duggal of HSBC Halbis, who also runs both long-only and long/short money – argued that there were still such issues with 10 of the top 20 companies in India.
The fact that things can turn so quickly in Asia should also give investors pause for thought again about Japan. Shuhei Abe, head of the big Sparx investment group in Tokyo and keynote speaker at this year’s forum, noted that – following the recent market malaise in Japan – there were now at least 100 listed companies with valuations less than the cash sitting on their balance sheets. There must be a point, he implied, when these equities get so cheap they become compelling.
The lesson might be that although China and India look fantastic long-term bets, after such strong recent performance, the short-term gains might be easier elsewhere.