Thailand and the Hedge Fund Connection
"An enterprise culture is one in which every individual understands that the world does not owe him or her a living."
Peter Morgan, b.1936, former director general, Institute of Directors (UK)
1998 Asian Crisis Re-dux? That is the sad memory evoked by yesterday's near 15% mini crash in Thailand's leading SET index after the monetary authorities heavy-handed efforts at administrative measures to stem the rise of the Baht. The local bond markets were also battered to the tune of 30 bps across the curve as sellers fled en masse.
Thailand's currency had reached 9.5 year highs versus the US Dollar and the Bank of Thailand's newly installed governor, Ms. Tarisa Watanagase, had had enough. In her anxiety and haste to stop the record US$950 million in weekly inflows on Thailand's capital account versus the US$300 million weekly pace experienced in November she panicked the financial markets. Lets not forget the fact too, that stemming the currency (temporarily) was a move to appease Thailand's powerful export industry lobby groups.
Back in 1998, many high profile global hedge funds (including Julian Robertson's Tiger) dominated information flows out of the region's central banks. Thailand's currency and forward markets succumbed to devaluation and a lot of well-placed hedge funds made a killing. It is not too surprising what a well-timed visit by an employee of the BoT to Jackson Hole could have had on a successful macro bet at that time.
The same cannot be said today in which the landscape of players has changed. The days of the multi-billion dollar global macro bully are past. In their place are many more, smaller single managers, of the pan-Asia long/short equity variety.
Net of fee returns for hedge funds investing in Asia have been solid so far in 2006. The average returns from a portfolio of hedge funds reported by a well-known Asian bank showed that Asia long/short equity strategy returned 12.59% through early December. This compares with 0.02% net of fee return for Japan long/short equity hedge fund managers and 13.33% for US long/short equity managers.
According to a recent NY university study, Asia ex. Japan's hedge fund industry reached US$102 billion in 2006 or about 8% of the total US$1.325 trillion hedge fund industry. This puts it at 48% of total estimated Asian hedge fund AUM (that include Japan and global managers too).
How does this compare to 2003? Well, then Asia ex. Japan estimated AUM were close to US$25 billion or 40% of total Asian assets. This was 3% of the estimated US$950 million total hedge fund industry.
While there are a few single managers that focus exclusively on Thailand, their approach is tilted towards taking an investor activist, private equity approach in addition to the ubiquitous long/short equity approach. Many of these players, if they learned anything from 1998 was to install liquidity gates and lock-ups. They should survive the current volatility as investors simply cannot pull out of their funds the next day. That said, managers are almost certainly long-biased in approach using futures on the index as their primary hedge. So one can expect potential bargain hunting in the current environment.
The bulk of capital involved in Thailand is likely to be pan-Asian long/short equity managers. This means that they will look at Thailand in addition to Korea, Malaysia, Singapore, Taiwan, HK and China as well as other geographies. As they also tend to be long-biased managers, they will in all likelihood be looking to add to positions rather than to liquidate wholesale and run.
While the motivations and practice of global macro and CTA/currency funds may be different (and a whole lot harder to identify and quantify) the chances are that it is the mutual funds and retail players that are likely to be the big short-term losers in the recent downturn as the Asian hedge fund industry continues to outgrow other regions like North America and Europe (albeit from a lower capital base). Mahalo.
"An enterprise culture is one in which every individual understands that the world does not owe him or her a living."
Peter Morgan, b.1936, former director general, Institute of Directors (UK)
1998 Asian Crisis Re-dux? That is the sad memory evoked by yesterday's near 15% mini crash in Thailand's leading SET index after the monetary authorities heavy-handed efforts at administrative measures to stem the rise of the Baht. The local bond markets were also battered to the tune of 30 bps across the curve as sellers fled en masse.
Thailand's currency had reached 9.5 year highs versus the US Dollar and the Bank of Thailand's newly installed governor, Ms. Tarisa Watanagase, had had enough. In her anxiety and haste to stop the record US$950 million in weekly inflows on Thailand's capital account versus the US$300 million weekly pace experienced in November she panicked the financial markets. Lets not forget the fact too, that stemming the currency (temporarily) was a move to appease Thailand's powerful export industry lobby groups.
Back in 1998, many high profile global hedge funds (including Julian Robertson's Tiger) dominated information flows out of the region's central banks. Thailand's currency and forward markets succumbed to devaluation and a lot of well-placed hedge funds made a killing. It is not too surprising what a well-timed visit by an employee of the BoT to Jackson Hole could have had on a successful macro bet at that time.
The same cannot be said today in which the landscape of players has changed. The days of the multi-billion dollar global macro bully are past. In their place are many more, smaller single managers, of the pan-Asia long/short equity variety.
Net of fee returns for hedge funds investing in Asia have been solid so far in 2006. The average returns from a portfolio of hedge funds reported by a well-known Asian bank showed that Asia long/short equity strategy returned 12.59% through early December. This compares with 0.02% net of fee return for Japan long/short equity hedge fund managers and 13.33% for US long/short equity managers.
According to a recent NY university study, Asia ex. Japan's hedge fund industry reached US$102 billion in 2006 or about 8% of the total US$1.325 trillion hedge fund industry. This puts it at 48% of total estimated Asian hedge fund AUM (that include Japan and global managers too).
How does this compare to 2003? Well, then Asia ex. Japan estimated AUM were close to US$25 billion or 40% of total Asian assets. This was 3% of the estimated US$950 million total hedge fund industry.
While there are a few single managers that focus exclusively on Thailand, their approach is tilted towards taking an investor activist, private equity approach in addition to the ubiquitous long/short equity approach. Many of these players, if they learned anything from 1998 was to install liquidity gates and lock-ups. They should survive the current volatility as investors simply cannot pull out of their funds the next day. That said, managers are almost certainly long-biased in approach using futures on the index as their primary hedge. So one can expect potential bargain hunting in the current environment.
The bulk of capital involved in Thailand is likely to be pan-Asian long/short equity managers. This means that they will look at Thailand in addition to Korea, Malaysia, Singapore, Taiwan, HK and China as well as other geographies. As they also tend to be long-biased managers, they will in all likelihood be looking to add to positions rather than to liquidate wholesale and run.
While the motivations and practice of global macro and CTA/currency funds may be different (and a whole lot harder to identify and quantify) the chances are that it is the mutual funds and retail players that are likely to be the big short-term losers in the recent downturn as the Asian hedge fund industry continues to outgrow other regions like North America and Europe (albeit from a lower capital base). Mahalo.
posted by Franklin Scruggins | 9:14 AM
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