Long-Biased Equity Strategies Still Underwater in Asia

"Remember this - that there is a proper dignity and proportion to be observed in the performance of every act of life."

Marcus Aurelius Antonius (121 AD - 180 AD)
Philosopher

Investors in many of the Asian region's long-biased equity strategies have suffered considerable performance heartburn according to latest YTD numbers. This fact, coupled with net outflows of assets and the "silent" closing of funds (Odey Japan, one of Rubato's and a whole host of others) is putting a lot of pressure in an industry that not too long ago was one of the highest growing in the global hedge fund industry. Not anymore.

The performance destruction among Asia funds and Japan funds has been equally bad. For example, according to the Banque Syz data from their Hedge Fund Advisory group for the period ending May 29 2008 (#22), 21 out of 27 funds of the Asia Equity variety carried negative YTD returns. The average of those negative returns was minus 8.84% while the positive funds posted 4.06% - which is not likely to pay for fees and associated costs. The average fund performance was minus 2.39%.

The best performer is Bill Hwang's Tiger Asia Overseas fund which returned 13.39%. The worst performer (not by far) is Martin Hughes' Tosca Asia Fund which posted minus 17.18%.

For Equity Japan, the average equal-weighted performance of the 44 funds was minus 2.48%. A total of 30 funds continue to post negative YTD retuns with the worst being Ken Nishizawa's Melchoir Japan Fund $ at minus 21.55%. This continues a pattern of double digit losses that has been seen over the last 2 years and it is almost certainly leading to serious assets depletion. On the positive side, the best performer on a YTD basis in the Banque Syz Japan Equity universe at 12.81% was the Martin Currie ARF - Japan Fund - VAMI managed by Donaldson, Temperley and Troup.

A worrying trend has been the fact that it seems very obvious that many of these funds are not in fact "hedged" their returns tend to mirror the direction and scale of returns offered by passive ETFs or traditional indices. It does not take an institutional investor with a degree in quant finance from MIT to work this out.

For this reason expect the new trend of managers to favor passive, low cost beta-vehicles to continue. Further, there may be a move towards more illiquid strategies including multi-strategy for above above performance in the near future. That is where alpha will be more easily produced which may be non-correlated (at least for the majority of the time). There is also an opportunity for 130-30 funds and equity market neutral strategies that can demonstrate an ability to produce alpha.

The days of the US$1 billion single manager strictly trawling Asia may be over unless of course the vehicle is large enough to be able to tackle large buyouts, private equity and real estate deals. I predict the emergence soon of the multi-strategy alternative investment shop. In the meantime, look for more "silent closings", primes getting squeezed and squeezing smaller managers and the industry to undergo major changes. Mahalo.