Asia Big Primes Prep for Deep Freeze

"One can survive everything, nowadays, except death, and live down everything except a good reputation."

Oscar Wilde, writer & poet

(1854 - 1900)

As overall trading flow from the US$1.5 trillion hedge fund industry asset goes, so goes associated service provider industries, including prime brokers.

Not too long ago (circa 2006) Asia hedge fund industry assets were an estimated US$150-200 billion or roughly 8-12% of total industry assets. Around a half of these assets came from Asia dedicated strategies which themselves comprised approx. 65-75% long short equity. The remainder came from so-called global managers (multi-strategy or global long/short equity) who, in the good old days, allocated anywhere from 10-40% of their global portfolios to Asia.

This latter group were (and still are) the real movers and shakers in the hedge fund business. They had the most capital to deploy, they were users of multi-currency and multi-market execution platforms (which favored the Big Primes) and they were largest users of stock lending, off balance sheet products, etc.

Pre Sub-Prime Era, global managers expanded their on-the-ground research and trading capabilities in Hong Kong, Singapore, Tokyo and to a lesser extent, Sydney. There were approximately 60 of these Big Funds. Today, many have scaled back laying off staff, allocating little to no money into Asian markets preferring to run night desk activity only, and shuttering any presence in Japan which has felt the biggest contraction on business.

Trading volumes have collapsed. Investors globally have withdrawn from Asia as they have from emerging markets. Not surprisingly, the unexpected drop in transactional activity, IPOs, in addition to the downward trend has changed the near term outlook for Big Primes as well as their competitors.

The pain has impacted all of the players including GS, MS and UBS. They are either laying off staff to skeleton shifts or they are quietly withdrawing altogether placing coverage to other time zones or regions. The next stage will hit Citi, ML, DB and then the other players in the so-called synthetic prime brokerage area including Nomura, Daiwa, Nikko et al.

This is not a short term change of course and talk of a rebound in the regions equity markets may be very premature. As even so called experts like Buffet have come to learn during the last few months, rather than merely another cyclical downturn (lasting 1-2 years) the Big Primes may in fact understand that this is a cyclical change (lasting 3+ years), and with the U.S. dollar falling there is less and less of an appetite to fund an increasingly expensive overseas operation in a stagnant trading environment.

The news will inevitable get a lot worse with many banks getting out of the prime brokerage business altogether in coming months and years. Depressing indeed. Mahalo.