Big Choices In Store For Asian Investors
"We shall not perish as a people even if we get our money supply wrong - but if we get our human relationships wrong, we shall destroy ourselves."
Rt. Reverend Robert Runcie, b. 1921 (former archbishop of Canterbury)
Heading into 2010 Asian institutional investors face decision time when it comes to hedge funds.
Who are we taling about? When one refers to the category of Asian institutional investors one refers to Japanese pension plans, insurance companies, agricultural coops and to a lesser extent city-banks, regionals and HNWI. Outside of Japan, we can include South Korean insurers, a few corporate pension plans, Taiwanese broker-dealers, Singaporian SWF entities, Hong Kong family offices, the HKJC and other foundations and last but not least Aussie supra-annuation funds - all in all probably close to $100 Billion in buying power back in 2007/8.
How bad was/is "the hit"? Trying to understand and quantify "losses" in hedge fund investments is very tough at the best of times. We estimate that approximately 40% of buying power was lost following the Volatility Shock of 2008/9. This has taken th ebiggest toll on the hedge fund of fund business which this author belives represented as much as 30% of total hedge fund of fund assets. For this reason, the hedge fund of fund business is in trouble. As many investors in Asia also had exposure to Madoff feeders and other notable blow-ups (e.g. Russell Investments FoHFs, Petters ABL product).
What next? Typical hedge fund products that have sold in the past have been "big brand names" offering risk/return profiles that can compete favorably with fixed income - nothing fancy, simply good, consistent positive yield, if possible sans-exchange risk. But the choices today are limited, either through the fact of gating among many so-called brand name funds in 2008/09 but also because even though global equities have rocketed since March 2009 the ficed income markets have become tough places to find yield without going out in duration or further along the low quality curve. Should investors now risk investing in long short equity strategies? Are the equity markets due to dip again short term? Is the U.S. Treasury market bubble about to burst? These are very relevant and tough decision that Asian investors have to consider, and are considering.
A new reality? The fact remains that the first half of 2010 performance is likely to be led by traditional long-only products are they have been in 2009. The fact is that even with average hedge fund performance up around 20% over 2009 this will lag the bounce seen across a number of long-only asset classes. This begs the question that hedge fund managers should be asking which is, can their strategies we repackaged in a way that takes advantage of long-only markets to offer greater upside potential without taking high-risk, concentrated bets. The answer is yes! Expect the new reality to include a new set of absolute return products that straddle the mutual fund and hedge fund worlds - ones that offers up different risk/return profiles and even different levels of leverage and fees too. many progressive firms are already marketing such products to U.S. and European institutional investors and they will no-doubt land in Asia very soon.
Exciting times indeed. Mahalo!
"We shall not perish as a people even if we get our money supply wrong - but if we get our human relationships wrong, we shall destroy ourselves."
Rt. Reverend Robert Runcie, b. 1921 (former archbishop of Canterbury)
Heading into 2010 Asian institutional investors face decision time when it comes to hedge funds.
Who are we taling about? When one refers to the category of Asian institutional investors one refers to Japanese pension plans, insurance companies, agricultural coops and to a lesser extent city-banks, regionals and HNWI. Outside of Japan, we can include South Korean insurers, a few corporate pension plans, Taiwanese broker-dealers, Singaporian SWF entities, Hong Kong family offices, the HKJC and other foundations and last but not least Aussie supra-annuation funds - all in all probably close to $100 Billion in buying power back in 2007/8.
How bad was/is "the hit"? Trying to understand and quantify "losses" in hedge fund investments is very tough at the best of times. We estimate that approximately 40% of buying power was lost following the Volatility Shock of 2008/9. This has taken th ebiggest toll on the hedge fund of fund business which this author belives represented as much as 30% of total hedge fund of fund assets. For this reason, the hedge fund of fund business is in trouble. As many investors in Asia also had exposure to Madoff feeders and other notable blow-ups (e.g. Russell Investments FoHFs, Petters ABL product).
What next? Typical hedge fund products that have sold in the past have been "big brand names" offering risk/return profiles that can compete favorably with fixed income - nothing fancy, simply good, consistent positive yield, if possible sans-exchange risk. But the choices today are limited, either through the fact of gating among many so-called brand name funds in 2008/09 but also because even though global equities have rocketed since March 2009 the ficed income markets have become tough places to find yield without going out in duration or further along the low quality curve. Should investors now risk investing in long short equity strategies? Are the equity markets due to dip again short term? Is the U.S. Treasury market bubble about to burst? These are very relevant and tough decision that Asian investors have to consider, and are considering.
A new reality? The fact remains that the first half of 2010 performance is likely to be led by traditional long-only products are they have been in 2009. The fact is that even with average hedge fund performance up around 20% over 2009 this will lag the bounce seen across a number of long-only asset classes. This begs the question that hedge fund managers should be asking which is, can their strategies we repackaged in a way that takes advantage of long-only markets to offer greater upside potential without taking high-risk, concentrated bets. The answer is yes! Expect the new reality to include a new set of absolute return products that straddle the mutual fund and hedge fund worlds - ones that offers up different risk/return profiles and even different levels of leverage and fees too. many progressive firms are already marketing such products to U.S. and European institutional investors and they will no-doubt land in Asia very soon.
Exciting times indeed. Mahalo!
posted by Franklin Scruggins | 7:52 PM
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