Half of Top Performing Hedge Funds Are "Asian"

"You must deodorize profits and make people understand that profit is not something offensive, but as important to a company as breathing."

Sir Peter Parker b.1924, former chairman of British Rail

With little under 6 weeks to go to the end of calendar year 2007 the latest statistics of global hedge fund managers according to the Banque Syz list of approximately 300 hedge fund managers have 9 out of the top 20 performers having a strong Asian influence - except for Japan of course.

If you include emerging markets in the mix (with China) then they comprised close to 66% of the top 20 funds! By the way, the list has the "lowest performance" of 55.74% in the Top Twenty.

Through 11.16.2007, the top performer was Golden China Fund up 102.78%. Run by George Jiang of Greenwoods Asset Management and with an AUM of approximately US$680 million the fund has clearly benefited from the powerful directional "beta" provided by the Chinese stock markets throughout the year.

For example, through the same period the Shenzen A-share Index returned 152.64%, the Shanghai A-share Index 98.27% and the Hang Seng Index 38.32%. In fact, investing in one of the seven China equity specialist names on the Banque Syz list would have offered you a range of positive YTD returns from 20.45% to 102.78%.

Not too shabby and probably much greater than the broader (lower) returns offer by a global stock-picking manager sitting in his comfortable "developed-country" environs of Manhattan or Greenwich, CT.

Incidentally, the above compares favorably to Japan's Nikkei 225 Index which has returned minus 12.02% YTD. Yikes!

Not just China. Of note too, is that in the Top Twenty there are a number of Indian hedge funds. Karma Offshore Fund Ltd - A, run by Nandita Parker Agarwal, was the best of the group and returned 67.17% through mid-November. Other notables included, Kotak Indian Mid Cap Fund (up 57.62%) and the long-biased India Capital Fund - A2 run by long time India specialist, Dr. Jon Thorn.

Japan Blues Continue. For that once proud and expansive hedge fund epicenter, Tokyo, the performance news continues to sour. A full 22 out of 39 hedge funds with a Japan concentration have so far put up negative YTD returns that extend as far as minus 30.44% for Michael Hill's Blue Sky Japan Inc. as of end October data. Incidentally, his AUM as reportedly at US$438 million, while performance of the fund in 2006 was minus 27.74% and an incredible positive 142.93% in 2005.

There remain a few postive performers in Japan - David Snoddy's Speedwell Advisors Limited with their Nezu Cayman Fund Ltd USD Class returned 69.12% on US$467 million in AUM through the end of September 2007 on a YTD basis.

Out of Singapore, UMJ's Dhia Bitar and Claudiu Lamba have their UMJ Vitrix Traders International Fund Ltd up 25.93%, although on a modest US$107 million in AUM as of end September 2007. In a few cases, these "positive" performers have had a wider geographical investment mandate that extends beyond simply Japan. Mahalo.

Hedge Fund Entry Stalled in India

"For a man to achieve all that is demanded of him he must regard himself as greater than he is."
Johann Wolfgang von Goethe

Sporting an estimated 50-75 single manager hedge funds trading long/short markets in India one might be a little surprised why the authorities at SENSEX recently made changes to put the proverbial brakes on hedge fund activity.

In reality, excessive trading activity has come not from a number of smaller players but from so-called global managers often following long/short equity, market neutral, multi-strategy and global macro strategies. This is where the real weight of assets has been impacting the market capitalization of India's stock exchange. If the experience of Japan in the early 2000s is a useful benchmark then there, these global funds effectively accounted for 50%-66% of all hedge fund assets trawling the equity markets. The same is probably true in India.

Indian stocks have been on fire; doubling to over 20,000 in 20 months! And on a year-to-date basis the Sensex was up 37% ion local currency terms and 65% in U.S. dollar terms.

The irony is that there is a misconception that hedge funds are "traders" of stock while mutual funds are "owners" of stock. Recent data from GS related to turnover in the U.S. markets disputes this naive view. Sensex authorities should take note!

The "door" that was closed was the use of P-notes or participatory notes. These instruments are effectively derivatives that are used to buy Indian shares, futures or options. The SEBI has since stated that after an 18-month window the P-notes will be banned.

This will not prevent the activities of hedge funds getting access through ADRs, Indian-listed shares in the U.S. or the U.K.

Finally, India's financial authorities whould understand that liquidity enhancement with new instruments and derivatives should be viewed as a positive aspect of market maturity that can effectively help Indian firms capital requirements as they take on their overseas counterparts in the years ahead. Mahalo!

Japanese Exposure to Sub-prime Loans May Exceed US$10 billion

"A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain."

Mark Twain

Talk in Tokyo over the last few months has started to focus on the fixed income products and structures sold by Aladdin Capital Management. The concerns reflect the fact that some of the products may have had underlying exposure to toxic U.S. sub-prime assets.

Charismatic CEO Amin Aladin is a figure of urban legend. His rags-to-riches story from fluent Japanese speaker-cum medical doctor in Kansai to hedge fund manager is well known in the Tokyo investment community. Indeed, he is believed to have an almost permanent presence in Tokyo at the Hotel Okura where he is frequently seen wining and dining Japanese bankers, regional bankers, lifers and other investors. Up until recently his CT based firm managed an estimated US$16 billion in hedge fund and other strategies.

Difficulties in the performance of fixed income arbitrage from the summer has put the spotlight and pressure on these strategies. For example, the Credit Suisse/Tremont Investable Fixed Income Arbitrage Index returned -1.02% in the third quarter of 2007 . This compared with 1.46% in the second quarter of 2007.

Just how much "damage" Japanese investors have suffered is not known for sure. But certainly, there are initial indications that the amounts being mentioned may be substantial and as yet "buried" on bank balance sheets or in off-balance sheet vehicles. And as is often said: "There is no smoke without fire!"

Of course, for long-term investors like pension plans the notion of losses will not necessarily be an issue that requires a mark-to-market recognition. All this makes it quite interesting how investors were clearly seduced into these strategies in the first place - the attraction of high yield (over Treasuries); the comfort that a Japanese speaking "gaijin" was looking after those assets; a stable dollar; and, an environment when fund of hedge fund verhicles were clearly disappointing as far as performance was concerned.

All these factors conspired to help the Aladdin sale - and lets not forget that U.S. investment banks were also aggressive sellers of these products, but without the close network-contacts of Aladin himself.

Bewildered and embarrassed, investors can now expect "new and improved" fund launches by Aladdin and others that focus on buying up these toxic subprime assets for the promise of big returns and better times ahead.

Depending how "deep" the hole of the products sold it is possible that a local distributor may also step up and make a strategic holding to protect their short run investment and commitment as joint distribution partners of Aladdin products and structures. Tough times face the Aladin business model with its heavy dependency on Japanese investors. As Keynes once said: "In the long run we are all dead".
Mahalo!