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Hedge Funds in Asia

Monday, July 28, 2008

Correlation Dilemma To Hamper Brains

"Drive thy business or it will drive thee"

Benjamin Franklin (1706 - 1790)

According to reports, Mitsubishi Asset Brains Co., the investment advisory arm of one of the largest city center banks in Japan is launching a fund of hedge funds. This time around the focus is on non-correlated returns. Now there is a novelty! This is like saying for the vast majority of the FoHF product range they are not currently focused on that as a starting point of their very existence. Odd indeed.

The fact of the matter is, finding managers with returns uncorrelated either to equities or fixed income is becoming more and more difficult. A recent diagram in a Lipper hedge fund report showed clearly the dilemma facing Nishi-san and his multi-billion dollar plans: correlations over the bulk of 6-month, 12-month and 36-month time horizons across 13 of the Credit Suisse/Tremont hedge fund sub-strategies point to GROWING correlation against the MSCI World Index. This is to be expected in time of market stress.

Only 4 of them showed solid non-correlation over the 6-month period. These were: Dedicated Short Bias, Global Macro, Equity Market Neutral and Managed futures. But over the longer 36-month time period even 3 of these "exceptions" proved to be positively correlated.

The bulk of sub-strategies exhibit a correlation with the MSCI World Index of between 0.6 to 0.85 which are high readings.

Which leads to the second dilemma, which is that if you are pretty much restricted to directional strategies are you not simply just offering a niche fund of funds with capacity limitations? That is what it sounds like to me.

Would it not be simplier and more cost effective to simply hedge against the MSCI World in order to achieve ones goal of non-correlation, and, at a sigificantly reduced cost?

Moreover, during the last 18-months there have been factors such as liquidity and deleveraging that have contributed to the apparent fall in correlation in some strategies such as with Equity Market Neutral - rather than being some fundamental shift in assets.

All told then, perhaps this "new" product is better described as yet another niche FoHF product designed to soak up institutional assets in Japan - something that is becoming increasingly difficult given the poor performance of a vast majority of products. You will certainly need sharp brains to sort this puzzle out. Mahalo.

Wednesday, July 09, 2008

India: A Middle Class of 230 Million Investors

"I believe in equality for everyone, except for reporters and photographers."

Mahatma Gandhi (1869- 1948)

Despite the double-digit negative performance of the Bombay Sensex so far in 2008, the growing wealth among Indians has spawned the country's first multi-family office. A former MD of industrial giant (and out-sourcing specialist), Infosys Technologies, as reported in The Times of India, established Ethos Capital Advisors to manage the wealth and trusts of a number of families.

The traditional method of wealth management had fallen upon individual families in collusion with their accountants with surplus funds parked in a separate company or trust structure. the current development is moving towards a more formal system of wealth management that has been copied in the U.S. and Europe over a number of generations already.

It is worth noting that the family offices have typically been unafraid to invest in alternatives including hedge funds, private equity and real estate. This development suggests that there may steady and increasing demand years for strategies and acorss various asset classes that diversify out of the Indian Rupee.

This might be a not-inconsequential sum given that it is generally known that there is a growing middle class in India numbering over 230 million people and that there are more dollar millionaries in India than there are in the U.S.

And, as if to drive home my point a recent GS report on global middle classes postulates that the incredible transfer of these new buyers into the global ecnomy will exert a new force both politically and in terms of what good and services are produced. Think about it. If only 1% of India's 230 million "middle classes" actually have disposable income in excess of US$10 million then that means there are 2.3 million potential hedge fund buyers about to enter the market!Opportunity knocks. Mahalo.