ASIA: space at the hedge fund table

but Asian investors are not likely to return just yet, finds Angele Spiteri Paris.

Hedge funds have had a tough time everywhere in the world and those in Asia are no exception. While the hedge fund industry in most Western regions seems to be recovering, the Asian hedge funds sector is still feeling some of the pain.

Recent data from Hedge Fund Research (HFR), a data provider, shows that following two consecutive quarters of capital inflows, the Asian hedge fund industry registered net redemptions of approximately US$700m (€551.2m) in the first quarter of 2010, reflecting continued concerns about strategic and regulatory risks.

But it was not all bad news. The withdrawals were offset by a performance-based increase of $1.5bn, and this resulted in total assets invested in Asia-focused hedge funds to reach just over $77bn. This represented an increase in assets when compared to the $72.3bn held by these funds at the end of 2009, but the figure is still way off the 2007 peak of $111.3bn.

HFR says that although the redemptions were relatively modest, they signified a divergence from recent trends in the overall hedge fund industry, which experienced an inflow of $13bn.

Singapore-based wealth manager and consultant GFIA says in a report on Asian hedge funds: “Many investors into Asian hedge funds were relatively inexperienced, in the context of Asian hedge fund investing, and therefore redeemed rapidly as they derisked generally.  This group is generally not returning to the markets yet.”

Capacity

As a result of the redemptions, there is significant capacity available in the Asian hedge fund market. GFIA says: “Until recently, the capacity picture of Asia resembled that of the rest of the world, with popular managers soft closing within twelve months.  A good track record virtually ensures a close within 36 months. With falling assets has come a general willingness to open to fresh capital. Just under 7% of Asian funds currently report more than $500m of assets, and GFIA’s experience is that almost all Asian funds are currently accepting capital.”In a study of Asian hedge fund launches, GFIA found that although the number of new funds is growing slowly and actual launches are getting smaller, the industry is still progressing at a healthy rate.

Peter Douglas, principal of GFIA, comments:  “The key issue for the majority of hedge funds in Asia is the current difficulty in raising assets. There’s no shortage of great managers and underexploited opportunities – the constraint is finding allocators with the experience, mandate, or confidence to allocate to skill-based managers in Asia.”

The firm found that it is increasingly difficult for new and smaller funds to raise assets.  As of end-March 2010, 70% of the funds launched in 2008 and 2009 are still $50m or less. Also, managers are launching smaller funds. According to GFIA, the average fund launch size in 2009 decreased to $40m at launch, half the figure for 2007.

There were 94 new launches in 2009, continuing a slowing of the historic growth rate of 25%-30% per annum over the early years of the industry. Long/short equity funds accounted for 45% of new launches. This is significantly lower than the existing 60% proportion of long/short funds in the universe. GFIA says this either suggests that the Asian industry is moving away from long/short equity as it matures or that investors were clearly disappointed with equity as an asset class last year, leading to fewer long/short equity fund launches.  

Performance
But the outlook is not all doom and gloom for Asian hedge funds. HFR found that Asian hedge funds continued to outperform equity benchmarks; the HFRX Japan Index gained 7.6% in the first quarter of the year, while the HFRX China Index was down -0.75%. This was the first quarter since the financial crisis in which developed Asian hedge funds outperformed emerging Asian funds, says the data provider.

According to GFIA: “The Asian capital markets are increasingly creating opportunities for event-driven managers. Asian macro, long a graveyard of early visionaries, has gained traction recently.  At least two net short equity funds were established in 2006, with reported performances of 26.75% and 38.26% for 2008. One of them did not survive the vigorous rally in 2009 and was liquidated. The other reported a performance of -19.08% for the year.”

But clouds still darken the Chinese hedge fund market.

China
Earlier this year GFIA announced it had stopped direct coverage of most hedge funds based in mainland China, as a result of their lack of transparency.

Having researched Chinese hedge funds since 2004, the consultant redeemed the majority of its discretionary holdings of mainland-run managers. In a report, GFIA said the mainland-based managers it was referring to have “a lack of fundamental transparency and openness”.

Despite finding some good and operationally sound managers, GFIA says it failed more Chinese managers at the due-diligence level than any other sub-group in its global universe.

Current Chinese law regulates Chinese mutual funds but bypasses any onshore hedge funds. This may well change as the mutual fund law review workgroup, set up by the China Securities Regulatory Commission, has reportedly reached an agreement to include privately raised funds as regulated mutual funds in the revised legislation.

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