The Golden Age of Hedge Funds in Asia is Officially Over
"Sometimes it is harder to deprive oneself of a pain than a pleasure."
F. Scott Fitgerald
Novelist, from Tender is the Night (1896-1940)
As 2008 draws to a close the case for investing in Asia dedicated hedge funds appears to be falling like the collective performance of the industry.
It seems like a million years ago when all of the fundamental arguments in favor of Asia were trumpted by the media, academics and managers-alike. Asia was the place of fast growth companies; a growing, middle class consumer; a place where savings still outstripped personal consumption; and, where hedge fund managers could trawl for more abundant alpha.
According to data as of late November 2008, a sample of diversified equity hedge funds specializing in Asia followed by HSBC Private Bank, produced an average year-to-date return of minus 24.04%. The worst performer at minus 94.47% was 788 China Fund Ltd run by Jacques Mechelany and Michel Artaud. The best performer was Arnott opportunities Fund at 4.14% run by Kenneth Arnott. Aside from the stunningly poor performance one cannot help but notice the fact that assets have declined substantially across this and other single managers.
Looking at diversified equity hedge funds specializing in Japan, HSBC produced an average year-to-date return of minus 13.16%. This is one of the few times when having exposure to Japan rather than the rest of the world might actually have been "good". The worst performer was GAM Japan Equity Hedge Fund run by Lesley Kaye at minus 46.00%. The best performer was Gary Rosenfeld's Rosehill Japan Fund A at 3.36% through the end of October 2008.
The problem with falling asset base is that it inevitably pressures managers into cutting overhead which means losing staff and rolling up strategies or even funds. It also leads to price pressure as managers do what he/she can to keep clients or find new ones (if they can!). This, in turn, means that there is less liquidity across Asian markets. So much for talk of decoupling, at least for now!
The hedge fund model in Asia (and elsewhere for that matter) is broken. It will take time, education and "proof in the pudding performance" to bring back investors into these strategies. This is not just an ailment afflicting simply hedge funds but long-only mutuals and more critically the hedge fund of fund model as well. If anything, this recent blight that has impacted global equity markets has highlighted the importance of the "hedge" in the term hedge fund and either your fund can do so or it can't.
In some ways we may see a return to the original hedge fund trading style initially launched way back in 1949 which was essentially an equity market neutral kind of strategy. The days of investors backing levered-beta factories may be over. I for one will not back someone who offered this model to me, cloaked it in a 2-and-20 fee schedule and still did not cushion my downside risk. It simply does not add up.
That said, for those looking for signs that a turnaround in the markets may be coming it might be wise to focus on the region's banking sector. When these "pop", the chances are that the markets will rebound sharply. The question for investors might be to get access to such beta through a cheap ETF rather than through an expensive hedge fund format. But even in a recessionary cycle there will likely be more than one bear market rally. Take care out there. Mahalo.
"Sometimes it is harder to deprive oneself of a pain than a pleasure."
F. Scott Fitgerald
Novelist, from Tender is the Night (1896-1940)
As 2008 draws to a close the case for investing in Asia dedicated hedge funds appears to be falling like the collective performance of the industry.
It seems like a million years ago when all of the fundamental arguments in favor of Asia were trumpted by the media, academics and managers-alike. Asia was the place of fast growth companies; a growing, middle class consumer; a place where savings still outstripped personal consumption; and, where hedge fund managers could trawl for more abundant alpha.
According to data as of late November 2008, a sample of diversified equity hedge funds specializing in Asia followed by HSBC Private Bank, produced an average year-to-date return of minus 24.04%. The worst performer at minus 94.47% was 788 China Fund Ltd run by Jacques Mechelany and Michel Artaud. The best performer was Arnott opportunities Fund at 4.14% run by Kenneth Arnott. Aside from the stunningly poor performance one cannot help but notice the fact that assets have declined substantially across this and other single managers.
Looking at diversified equity hedge funds specializing in Japan, HSBC produced an average year-to-date return of minus 13.16%. This is one of the few times when having exposure to Japan rather than the rest of the world might actually have been "good". The worst performer was GAM Japan Equity Hedge Fund run by Lesley Kaye at minus 46.00%. The best performer was Gary Rosenfeld's Rosehill Japan Fund A at 3.36% through the end of October 2008.
The problem with falling asset base is that it inevitably pressures managers into cutting overhead which means losing staff and rolling up strategies or even funds. It also leads to price pressure as managers do what he/she can to keep clients or find new ones (if they can!). This, in turn, means that there is less liquidity across Asian markets. So much for talk of decoupling, at least for now!
The hedge fund model in Asia (and elsewhere for that matter) is broken. It will take time, education and "proof in the pudding performance" to bring back investors into these strategies. This is not just an ailment afflicting simply hedge funds but long-only mutuals and more critically the hedge fund of fund model as well. If anything, this recent blight that has impacted global equity markets has highlighted the importance of the "hedge" in the term hedge fund and either your fund can do so or it can't.
In some ways we may see a return to the original hedge fund trading style initially launched way back in 1949 which was essentially an equity market neutral kind of strategy. The days of investors backing levered-beta factories may be over. I for one will not back someone who offered this model to me, cloaked it in a 2-and-20 fee schedule and still did not cushion my downside risk. It simply does not add up.
That said, for those looking for signs that a turnaround in the markets may be coming it might be wise to focus on the region's banking sector. When these "pop", the chances are that the markets will rebound sharply. The question for investors might be to get access to such beta through a cheap ETF rather than through an expensive hedge fund format. But even in a recessionary cycle there will likely be more than one bear market rally. Take care out there. Mahalo.
posted by Franklin Scruggins | 12:27 PM
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