Big Institutions Hungry for Asian Single Managers

"The secret of business is knowing something that nobody else knows."

Aristotle Onassis (1906-1975)

How does a big eater search for filling crumbs on a crowded table? When the US$220 billion public pension fund called CalPERs makes any announcement regarding alternative investments, people listen.

The reason they listen is twofold. First, it is often regarded as the "early adoptor" in the hedge fund space so when it comes to investing other like-minded U.S. institutions will not be too far away (perhaps 12-18 months). The other reason involves the likely direction of fees. Believe it or not, many of the funds that CalPERS invests in effectively "pay" for the privilege by offering lower fees, capacity guarantees or both. As one U.S. based fund of fund manager said several years ago "you hardly make any money on fees from those guys". It is a well-known fact that they drive a hard bargain. So why do hedge fund firms want CalPERs as an investor? Ego. It sounds good at cocktail parties, like a badge of honor to show off to other potential institutional investors (who might pay full fees hopefully...)


So what might CalPERs be thinking of, after all, they already have allocations to Asian hedge funds through 3 well-known Asia-based fund of hedge fund firms (FoHF): Sparx, Vision and KBC Alpha. There is also a lone European on the list in Ermitage European FoHF.

The announced plan ensures that an additional US$400 million will find its way into single managers before the end of 2006. The timing couldn't be any more interesting given the pathetic absolute performance of many Japan managers and the equally disappointing performance of those Asian FoHF firms mentioned e.g. through Sep 2006, Vision Maximus FoHF was up a paltry 0.91% YTD and looking to post its worst annual performance in its 5 year existence.

It seems that CalPERs without an office in Tokyo or Hong Kong still feels comfortable enough to make their own investment decisions regarding many potential single manager funds in Asia - hardly a ringing endorsement of their existing Asian HFoF exposures. But at least they have taken a cautious approach building a potential list of managers through the 3 HFoFs that they already are invested in!

Look at the decision recently taken by the equally forward looking Yale Endowment. Many institutional investors are probably revising down return expectations from many hedge fund strategies including HFoFs and that includes those in Asia and Europe.

One approach may be to cut "losers" and focus on low cost, passive exposure to a region and tilt the portfolio towards more focused, absolute return opportunities - and in this regard CalPERs might prefer a value bias. That could mean going more illquid into the distressed/private equity arenas or even via infrastructure or real estate. After all, where will Asia's newly minted middle-class want to live in the next 20 years? The same old shanty towns? Hardly.

Where in Asia might the money flow? CalPER's Japan investments already have approx. US$500 million in a couple of activist funds run by WL Ross and Sparx. India looks toppy with SENSEX continuing to hit new highs although private equity is still very much sought after, while China has rebounded already very nicely this year so how far can that opportunity go?

Which brings up the issue of single manager hedge fund capacity in Asia. Where is it coming from? And will it make sense for an established investor like CalPERS to put money into the same large asset managers it probably already has exposure to in its FoHF programs? Probably not. Diversification is the name of the game be it related to geography, strategy and firm size - probably in reverse order of importance! Perhaps, CalPERs has discovered something that its existing Asian HFoFs are not currently doing? Surprises are no doubt in store.

This announcement will also provide a psychological boost to Asian institutional investors and their own investment planning. After all, didn't a Chinese bank just make it to being the world's largest IPO at US$19 billion and was massively oversubscribed to boot. The question is how long before they expand beyond market neutral and long short equity on the single manager side and the big global HFoF. And then, aren't we heading back down that familar road of capacity again? Where is it? Will big investors (US, European or Asian) with big appetites ever be satisfied by newer, relatively smaller funds in Asia? My guess is that if they perform as expected "yes". Mahalo.