Asia Multi-Strategy: A Misunderstood Secret?
"Making money is art and working is art and good business is the best art of all."
Andy Warhol (1926-1987), artist
A commentary in a recent drive-by media piece entitled "Japan HF Conference Highlights a Paucity of Strategies" caught my eye. With a majority of investors focusing on Japan Long/Short Equity and other Asian Long/Short Equity strategies I wondered what the reality must be?
First, a little recap with some historical context. It is true that Long/Short Equity has dominated captial managed by hedge funds in Japan and Asia. According to many analysts Long/Short Equity strategies make up over 50% of all AUM (assets under management) in Asia. Why? There is an historical context. Back in the mid 80s macro and managed futures were all the rage in the region, there were many investors and the beginnings of a few large hedge funds poking their noses into the equity markets.
The bias towards directional stratgies took on added interest with the explosion of the Nikkei and large cap growth under the guise of "a new paradigm" in the 1990s. Large U.S. trading shops like Salomon Bros. and Morgan Stanley started to ramp up their derivative trading operations and made huge big profits.
Big global hedge funds jumped onto the bandwagon not only playing directional strategies like Long/Short Equity in Tokyo but extending to these new and burgeoning relative value strategies including warrants, basket trading, ADR/GDR trading, volatility and stat arbitrage, convertible and stub trading. In short, the whole array that is being practiced today by dedicated Asia multi-strategy shops inside and outside the region. Urban legend has it that one player (same name as a famous U.S. military academy) garnered over 50% of its global trading profits one year out of Japan.
But with the 1998 Asian Crisis and the emergence of the Japan Premium the case for Japanese banks and brokers suddenly changed for the worse. It opened the door for international investment banks to get into profitable prime brokerage with hedge funds looking at the region. GS and MS established a multi-currency execution capability stranglehold that they continue to hold today.
The subsequent lengthy malaise in the region's equity markets together with disinflation, "hollowing-out" and the plummeting of Japanese interest rates sucked the wind out of many of these global actors: Citadel, Soros, Caxton, Tudor, Highbridge, SAC, Renaissance Tech, OZ, HBK and DKR. They reduced their estimated collective opportunistic exposures to the region and in some cases pulled back operations altogether to focus on other geographies and strategies as stock borrow became difficult for many to maintain balanced/hedges or positions. Many hedge funds focusing on Japan started to re-think their investment strategies as well (Penta, Joho etc).
Fast forward to May 2003. This marked the low point in the Nikkei 225 index and the perception that an economic turnaround of significant global proportions was underway in Japan. Suddenly the risk premium associated with investing in Japan was removed. The Japanese goverment refused to effectively "nationalize" local banks burdened by bad debt. The big global hedge funds (Multi-Strategy, Long/Short Equity, Equity Market Neutral, Event Driven) started to pile in and look not only at operational resources for Japan but for the whole Asia-BRIC investment theme. Reconstruction of Japan's economy and the weeding out of "zombie companies" became a profitable theme for many hedge funds.
Not surprisingly, the 2001-2003 window is the time when the vast majority of Asia dedicated multi-strategy funds started. Typically, they were founded by former prop traders at big banks with a strong convertible arbitrage background. Some worked the night desks in London and/or New York or even lived for a time in HK or Tokyo. Another select few came from big global players themselves, with a few making money by informational arbitrages that existed in a Japan affliicted by limited broker-company coverage with price action often spurred by talk, rumor and retail activity.
Today, Asia and Japan multi-strategy single funds exist. They have been around for quite some time and in many cases over 4-5 years now. There are roughly 20 active players according to commerically available databases. Managers are domiciled around the world with the weightiest capital coming from the following locations (in decreasing order): UK, US, HK and Singapore then Australia.
Their combined AUM managed currently run at US$ 4.5 billion. If you add global hedge funds trading Asia multi-strategy then this figure might run as high as US$ 15 billion, depending on market liquidity.
Asian multi-strategy funds come in differing sizes. Some run in the US$800- US$1.5 billion bracket. These have very often been funded/seeded by private banks or other well-pocketed investment groups.
Then there are the other players (the vast majority) which are more often than not the entreprenuerial traders who have started out with friends and family money. They tend to be stuck in the AUM "no-mans-land" of US$70-150 million. This group must grow to justify the typically extra resources needed to effectively run their operations vs. that of the plain vanilla Long/Short Equity shops.
It appears that those managers that have enjoyed successful and rapid AUM growth have managed to find and secure the backing of financial groups who perhaps are not established in the region. Also, they might also have unlocked the key to big institutional investors whether in Canada, US endowments or Swiss lifers and pension plans who crave diversification that is global and not correlated to certain passive benchmarks.
What about performance? If you look at data that runs up to May 2006, dedicated Asian multi-strategy funds have posted annualized returns in a -0.43% to 219% range. If you take out outliers and look instead at an equal weighted average, annualized performance of these funds is roughly 12-14%.
On volatility, annualized SD for many of these funds comes in a wide range too from 2.81% to 59.39%, with an equal weighted average of 7.5%.
The good news is that Asia multi-strategy funds do seem to effectively produce a positive risk-adjusted returns with Sharpe Ratios ranging from -2.18 to 2.20, with an average Sharpe of just over 1.2.
On correlation, many Asia multi-strategy managers exhibit a range of correlations to the Nikkei 225 from negative to 0.40.
How does Asia multi-strategy stack up against global multi-strategy single managers? According to the CS/Tremont Multi-Strategy sub-index annualized performance, vol and Sharpe (through May 2006) are: 9.65%, 4.32% and 1.03. This means that Asia can give the investor an additional 3.0%-4.0% greater return but also almost 2 X the volatility for roughly the same Sharpe. Of course individual managers are exceptions to this gross generalization but perhaps the most interesting finding is that smaller multi-strategy funds might be the favored vehicles as the larger ones move closer to the "norm" risk/return" profiles.
So there really are a whole range and variety of choices for an investor to make in terms of understanding the risk/return profile of available managers. And believe it or not Asia multi-strategy appears to exhibit sub-classifications at least in terms of their demonstrated risk/return profiles and correlation characteristics. So, not all Asia multi-strategy managers are alike!
It is not only a case of understanding the attibution of his past profiles but how the manager seeks out alpha when liquidity alters in specific Asian markets or instruments (like converts) which will be the key to successful investing. It is a pity that recent conference attendees did not open their eyes and note the not so now secret habits and performance of Asia multi-strategy managers. They exist with many capable ones out there.
Perhaps the biggest hindrance to their greater recognition and acceptance among investors is what strategy bucket they fill - they are not really Long/Short Equity (Asia or International) and they are not really Global Multi-Strategy? Perhaps they should be viewed as a fairly new type of cross-over trading (geographically and strategically) in order to "fit in" to conventional classifications.
Mahalo!
"Making money is art and working is art and good business is the best art of all."
Andy Warhol (1926-1987), artist
A commentary in a recent drive-by media piece entitled "Japan HF Conference Highlights a Paucity of Strategies" caught my eye. With a majority of investors focusing on Japan Long/Short Equity and other Asian Long/Short Equity strategies I wondered what the reality must be?
First, a little recap with some historical context. It is true that Long/Short Equity has dominated captial managed by hedge funds in Japan and Asia. According to many analysts Long/Short Equity strategies make up over 50% of all AUM (assets under management) in Asia. Why? There is an historical context. Back in the mid 80s macro and managed futures were all the rage in the region, there were many investors and the beginnings of a few large hedge funds poking their noses into the equity markets.
The bias towards directional stratgies took on added interest with the explosion of the Nikkei and large cap growth under the guise of "a new paradigm" in the 1990s. Large U.S. trading shops like Salomon Bros. and Morgan Stanley started to ramp up their derivative trading operations and made huge big profits.
Big global hedge funds jumped onto the bandwagon not only playing directional strategies like Long/Short Equity in Tokyo but extending to these new and burgeoning relative value strategies including warrants, basket trading, ADR/GDR trading, volatility and stat arbitrage, convertible and stub trading. In short, the whole array that is being practiced today by dedicated Asia multi-strategy shops inside and outside the region. Urban legend has it that one player (same name as a famous U.S. military academy) garnered over 50% of its global trading profits one year out of Japan.
But with the 1998 Asian Crisis and the emergence of the Japan Premium the case for Japanese banks and brokers suddenly changed for the worse. It opened the door for international investment banks to get into profitable prime brokerage with hedge funds looking at the region. GS and MS established a multi-currency execution capability stranglehold that they continue to hold today.
The subsequent lengthy malaise in the region's equity markets together with disinflation, "hollowing-out" and the plummeting of Japanese interest rates sucked the wind out of many of these global actors: Citadel, Soros, Caxton, Tudor, Highbridge, SAC, Renaissance Tech, OZ, HBK and DKR. They reduced their estimated collective opportunistic exposures to the region and in some cases pulled back operations altogether to focus on other geographies and strategies as stock borrow became difficult for many to maintain balanced/hedges or positions. Many hedge funds focusing on Japan started to re-think their investment strategies as well (Penta, Joho etc).
Fast forward to May 2003. This marked the low point in the Nikkei 225 index and the perception that an economic turnaround of significant global proportions was underway in Japan. Suddenly the risk premium associated with investing in Japan was removed. The Japanese goverment refused to effectively "nationalize" local banks burdened by bad debt. The big global hedge funds (Multi-Strategy, Long/Short Equity, Equity Market Neutral, Event Driven) started to pile in and look not only at operational resources for Japan but for the whole Asia-BRIC investment theme. Reconstruction of Japan's economy and the weeding out of "zombie companies" became a profitable theme for many hedge funds.
Not surprisingly, the 2001-2003 window is the time when the vast majority of Asia dedicated multi-strategy funds started. Typically, they were founded by former prop traders at big banks with a strong convertible arbitrage background. Some worked the night desks in London and/or New York or even lived for a time in HK or Tokyo. Another select few came from big global players themselves, with a few making money by informational arbitrages that existed in a Japan affliicted by limited broker-company coverage with price action often spurred by talk, rumor and retail activity.
Today, Asia and Japan multi-strategy single funds exist. They have been around for quite some time and in many cases over 4-5 years now. There are roughly 20 active players according to commerically available databases. Managers are domiciled around the world with the weightiest capital coming from the following locations (in decreasing order): UK, US, HK and Singapore then Australia.
Their combined AUM managed currently run at US$ 4.5 billion. If you add global hedge funds trading Asia multi-strategy then this figure might run as high as US$ 15 billion, depending on market liquidity.
Asian multi-strategy funds come in differing sizes. Some run in the US$800- US$1.5 billion bracket. These have very often been funded/seeded by private banks or other well-pocketed investment groups.
Then there are the other players (the vast majority) which are more often than not the entreprenuerial traders who have started out with friends and family money. They tend to be stuck in the AUM "no-mans-land" of US$70-150 million. This group must grow to justify the typically extra resources needed to effectively run their operations vs. that of the plain vanilla Long/Short Equity shops.
It appears that those managers that have enjoyed successful and rapid AUM growth have managed to find and secure the backing of financial groups who perhaps are not established in the region. Also, they might also have unlocked the key to big institutional investors whether in Canada, US endowments or Swiss lifers and pension plans who crave diversification that is global and not correlated to certain passive benchmarks.
What about performance? If you look at data that runs up to May 2006, dedicated Asian multi-strategy funds have posted annualized returns in a -0.43% to 219% range. If you take out outliers and look instead at an equal weighted average, annualized performance of these funds is roughly 12-14%.
On volatility, annualized SD for many of these funds comes in a wide range too from 2.81% to 59.39%, with an equal weighted average of 7.5%.
The good news is that Asia multi-strategy funds do seem to effectively produce a positive risk-adjusted returns with Sharpe Ratios ranging from -2.18 to 2.20, with an average Sharpe of just over 1.2.
On correlation, many Asia multi-strategy managers exhibit a range of correlations to the Nikkei 225 from negative to 0.40.
How does Asia multi-strategy stack up against global multi-strategy single managers? According to the CS/Tremont Multi-Strategy sub-index annualized performance, vol and Sharpe (through May 2006) are: 9.65%, 4.32% and 1.03. This means that Asia can give the investor an additional 3.0%-4.0% greater return but also almost 2 X the volatility for roughly the same Sharpe. Of course individual managers are exceptions to this gross generalization but perhaps the most interesting finding is that smaller multi-strategy funds might be the favored vehicles as the larger ones move closer to the "norm" risk/return" profiles.
So there really are a whole range and variety of choices for an investor to make in terms of understanding the risk/return profile of available managers. And believe it or not Asia multi-strategy appears to exhibit sub-classifications at least in terms of their demonstrated risk/return profiles and correlation characteristics. So, not all Asia multi-strategy managers are alike!
It is not only a case of understanding the attibution of his past profiles but how the manager seeks out alpha when liquidity alters in specific Asian markets or instruments (like converts) which will be the key to successful investing. It is a pity that recent conference attendees did not open their eyes and note the not so now secret habits and performance of Asia multi-strategy managers. They exist with many capable ones out there.
Perhaps the biggest hindrance to their greater recognition and acceptance among investors is what strategy bucket they fill - they are not really Long/Short Equity (Asia or International) and they are not really Global Multi-Strategy? Perhaps they should be viewed as a fairly new type of cross-over trading (geographically and strategically) in order to "fit in" to conventional classifications.
Mahalo!
posted by Franklin Scruggins | 7:17 PM
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