The Incredible Shrinking Asian Hedge Fund Industry
"Everything's got a moral, if only you can find it."
Lewis Carroll, 1865 from Alice in Wonderland
The incredible shrinking Asian hedge fund market saw combined assets drop to around 9% of estimated US$1.2 trillion in global industry assets as at the end of 2008. This is in stark contrast to about 15% of global hedge fund assets that Asia represented in late 2007 (when industry assets topped US$1.87 trillion).
The scary thing is that the Asian hedge fund industry may shrink to under $80 billion by 2010 as the number of hedge fund "corpses" continue to pile up; especially if many long/short equity managers do not learn how to profit from short positions! The possible losses would take the Asian hedge fund industry back to late 2004- early 2005 asset levels.
Latest data from HFR confirmed this longer term negative trend.
It started once international investors started to flee Japanese markets in 2006. Equity Long/Short strategy alpha proved fleeting and illusory, while the so-called activist theme broke down when a number of high profile managers were exposed in legal difficulties. Institutional investors started to sour on Japan, quickly followed by the rest of Asia as the "levered beta factories" collapsed in stunning correlation with the region's equity benchmarks.
Japan was important as it was the first to crack; it also offered the deepest equity market so once that went it was a matter of time for the rest of the region to tumble lock-in-step. Bad sentiment in one geography can easily lead to highly correlated liquidity issues across many geographies.
The hedge fund asset pullback picked up steam from mid-2007. This was due to a drop in Chinese and Indian equity markets that chased away a number of fund of momentum (hedge fund of fund) investors.
Meanwhile, a broader theme of de-leveraging, a reversal of the carry trade and a flight to quality led to a massive pullback in global portfolio investments in so-called "risky" assets in Asia. The bubble had burst and and money pulled back into the most liquid, and "safe" instruments - U.S. Treasuries.
Volumes on regional stock exchanges plummeted and continue to so so as retail investors have also been forced to delever, either directly or indirectly.
All told, this makes Asia a pretty barren trading environment these days for active long/short equity managers. Fundamentals are not shaping out too good as the U.S. and European consumer markets reduce demand for Asian exports while a number of local currencies remain undervalued, with the Chinese Yuan being the obvious miscreant.
Sadly, the short term outlook for the overall industry in Asia remains bleak. Hedge funds will continue to close at an alarming rate; capacity from quality managers will continue to shrink as liquidity remains tight across many asset classes; and, as long as the cost of doing business is remains prohibitive, multi-strategy single managers (the big boys) may stick to opportunistic night desk investing in Asia out of London and New York rather than in expensive Tokyo or Hong Kong outposts.
One man's pain can be another's opportunity. It is time for the region's financial and commodity exchanges as well as their respective monetary authorities to seize this moment to save the industry. Even after accounting for all its high profile "faults" the hedge fund industry plays a positive role in the efficient movement of capital through an economy. They can provide liquidity to markets across various time periods and they can also act to ensure that the management of public companies act in the interest of shareholders - by keeping a vibrant voice on board level policy. Enough of the old style waste and politic-ing.
Greater co-operation and coordination among Asian partners would be an important step to increasing the attractiveness of the region once the industry starts to grow again. This would mean a greater number of high quality derivative instruments to trade, to hedge and speculate in; lower transaction costs and the removal of unnecessary bureaucracy involved for start-up managers; tax breaks to encourage rather than discourage exchange-related activities and trading; and, greater coordination when regulation finally takes shape.
It makes sense to nurture the hedge fund industry as a valuable addition to the region's service industry employment; to retain talent and ultimately to secure a greater number of high value investment opportunities for local institutional investors. The alternative will be Asians relying on Londoners or New Yorkers to continue to manage their trillion dollar pension and insurance assets; an unsavory thought for Asian patriots and Asianophiles like me. Mahalo.
"Everything's got a moral, if only you can find it."
Lewis Carroll, 1865 from Alice in Wonderland
The incredible shrinking Asian hedge fund market saw combined assets drop to around 9% of estimated US$1.2 trillion in global industry assets as at the end of 2008. This is in stark contrast to about 15% of global hedge fund assets that Asia represented in late 2007 (when industry assets topped US$1.87 trillion).
The scary thing is that the Asian hedge fund industry may shrink to under $80 billion by 2010 as the number of hedge fund "corpses" continue to pile up; especially if many long/short equity managers do not learn how to profit from short positions! The possible losses would take the Asian hedge fund industry back to late 2004- early 2005 asset levels.
Latest data from HFR confirmed this longer term negative trend.
It started once international investors started to flee Japanese markets in 2006. Equity Long/Short strategy alpha proved fleeting and illusory, while the so-called activist theme broke down when a number of high profile managers were exposed in legal difficulties. Institutional investors started to sour on Japan, quickly followed by the rest of Asia as the "levered beta factories" collapsed in stunning correlation with the region's equity benchmarks.
Japan was important as it was the first to crack; it also offered the deepest equity market so once that went it was a matter of time for the rest of the region to tumble lock-in-step. Bad sentiment in one geography can easily lead to highly correlated liquidity issues across many geographies.
The hedge fund asset pullback picked up steam from mid-2007. This was due to a drop in Chinese and Indian equity markets that chased away a number of fund of momentum (hedge fund of fund) investors.
Meanwhile, a broader theme of de-leveraging, a reversal of the carry trade and a flight to quality led to a massive pullback in global portfolio investments in so-called "risky" assets in Asia. The bubble had burst and and money pulled back into the most liquid, and "safe" instruments - U.S. Treasuries.
Volumes on regional stock exchanges plummeted and continue to so so as retail investors have also been forced to delever, either directly or indirectly.
All told, this makes Asia a pretty barren trading environment these days for active long/short equity managers. Fundamentals are not shaping out too good as the U.S. and European consumer markets reduce demand for Asian exports while a number of local currencies remain undervalued, with the Chinese Yuan being the obvious miscreant.
Sadly, the short term outlook for the overall industry in Asia remains bleak. Hedge funds will continue to close at an alarming rate; capacity from quality managers will continue to shrink as liquidity remains tight across many asset classes; and, as long as the cost of doing business is remains prohibitive, multi-strategy single managers (the big boys) may stick to opportunistic night desk investing in Asia out of London and New York rather than in expensive Tokyo or Hong Kong outposts.
One man's pain can be another's opportunity. It is time for the region's financial and commodity exchanges as well as their respective monetary authorities to seize this moment to save the industry. Even after accounting for all its high profile "faults" the hedge fund industry plays a positive role in the efficient movement of capital through an economy. They can provide liquidity to markets across various time periods and they can also act to ensure that the management of public companies act in the interest of shareholders - by keeping a vibrant voice on board level policy. Enough of the old style waste and politic-ing.
Greater co-operation and coordination among Asian partners would be an important step to increasing the attractiveness of the region once the industry starts to grow again. This would mean a greater number of high quality derivative instruments to trade, to hedge and speculate in; lower transaction costs and the removal of unnecessary bureaucracy involved for start-up managers; tax breaks to encourage rather than discourage exchange-related activities and trading; and, greater coordination when regulation finally takes shape.
It makes sense to nurture the hedge fund industry as a valuable addition to the region's service industry employment; to retain talent and ultimately to secure a greater number of high value investment opportunities for local institutional investors. The alternative will be Asians relying on Londoners or New Yorkers to continue to manage their trillion dollar pension and insurance assets; an unsavory thought for Asian patriots and Asianophiles like me. Mahalo.
posted by Franklin Scruggins | 3:14 PM
2 Comments:
This comment has been removed by the author.
Hi,
I found your commentary on the hedge fund situation in Asia very interesting. I work at Nomura. Is there any way I can get in touch with you? My email address is ibankquant@gmail.com.
Thanks.
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