Regulatory & Tax Arbitrage (Not Markets) May Spark Asian Hedge Fund Industry
"The Secret of creativity is knowing how to hide your sources."
Albert Einstein, physicist (1879 - 1955)
Caveat Emptor. The apparent shuffling of feet you might hear of large global multi-stratregy shops moving back to Asian financial centers is not a direct result of better risk/return investment opportunities unfolding in 2010. This author believes that it is best thought of as a regulatory and tax arbitrage play facing threats from existing centers, and in particular in New York and London.
Asia long-only the way to go? Over the last 4-5 years many global institutional investors have pulled back from hedge fund long/short strategy investments in Asia and have instead sought low-cost beta alternatives such as through ETFs. Returns from MSCI Emerging Market Index +70.31% in 2009 certainly look attractive, but are tempered by the 2.64% return over a 3-year period. Likewise, the MSCI Asia Pacific Index gained +134.46% in 2009 but was -5.01% over a 3-year period and the "dog" of the group, the MSCI Japan Index, returned 6.68% in 2009, but was down -11.15% over a 3-year period.
HNWI and fund of hedge funds have also "abandoned" Asia to a large extent. Many of these investors chsed the +20% returns that many smaller managers boasted. These investors used to be the traditional supporters of new and growing funds in the region and a few years back there were close to 80-90 hedge fund of funds with an Asia-focus. Not anymore!
Sadly, the risk/return profile of many locally-situated managers have been constrained by the realities of: capacity constraints(around $400 million and the typical fund woulkd face stock-borrow "issues"); an inability to produce positive returns on the short-side of their books especially when the markets go down; and, the uncanny realization that being in Asia does not a good hedge fund manager make. There is no extra advantage, unless you are an activist and rely on local connections and ideas to source investments.
With a few large multi-strategy shops opening up in Singapore and Hong Kong some sort of investment renaissance may be underway. This may yet be the case although until we see new funds and a high number of start-ups (which is not yet the case) I believe that it is rather a play to potentially arbitrage existing assets and taxpayers out of potentially "painful regimes". This may be worth looking at closely in the next 6-12 months and should gather steam as the U.S., U.K. and European authorities come down hard on hedge funds as part of their overall promise to the taxpapying public to fix the existing financial regimes.
New instruments, tax breaks & insitutional investors. What really is needed are new hedging instruments, tax breaks to lure in fresh talent, the dismantling of bureaucratic rule to set up a fund and growing allocations by local institutional investors to back local hedge fund talent. Failure to do so will result in yet another wave of temporary not permanent interest in hedge fund strategies in Asia. Mahalo.
"The Secret of creativity is knowing how to hide your sources."
Albert Einstein, physicist (1879 - 1955)
Caveat Emptor. The apparent shuffling of feet you might hear of large global multi-stratregy shops moving back to Asian financial centers is not a direct result of better risk/return investment opportunities unfolding in 2010. This author believes that it is best thought of as a regulatory and tax arbitrage play facing threats from existing centers, and in particular in New York and London.
Asia long-only the way to go? Over the last 4-5 years many global institutional investors have pulled back from hedge fund long/short strategy investments in Asia and have instead sought low-cost beta alternatives such as through ETFs. Returns from MSCI Emerging Market Index +70.31% in 2009 certainly look attractive, but are tempered by the 2.64% return over a 3-year period. Likewise, the MSCI Asia Pacific Index gained +134.46% in 2009 but was -5.01% over a 3-year period and the "dog" of the group, the MSCI Japan Index, returned 6.68% in 2009, but was down -11.15% over a 3-year period.
HNWI and fund of hedge funds have also "abandoned" Asia to a large extent. Many of these investors chsed the +20% returns that many smaller managers boasted. These investors used to be the traditional supporters of new and growing funds in the region and a few years back there were close to 80-90 hedge fund of funds with an Asia-focus. Not anymore!
Sadly, the risk/return profile of many locally-situated managers have been constrained by the realities of: capacity constraints(around $400 million and the typical fund woulkd face stock-borrow "issues"); an inability to produce positive returns on the short-side of their books especially when the markets go down; and, the uncanny realization that being in Asia does not a good hedge fund manager make. There is no extra advantage, unless you are an activist and rely on local connections and ideas to source investments.
With a few large multi-strategy shops opening up in Singapore and Hong Kong some sort of investment renaissance may be underway. This may yet be the case although until we see new funds and a high number of start-ups (which is not yet the case) I believe that it is rather a play to potentially arbitrage existing assets and taxpayers out of potentially "painful regimes". This may be worth looking at closely in the next 6-12 months and should gather steam as the U.S., U.K. and European authorities come down hard on hedge funds as part of their overall promise to the taxpapying public to fix the existing financial regimes.
New instruments, tax breaks & insitutional investors. What really is needed are new hedging instruments, tax breaks to lure in fresh talent, the dismantling of bureaucratic rule to set up a fund and growing allocations by local institutional investors to back local hedge fund talent. Failure to do so will result in yet another wave of temporary not permanent interest in hedge fund strategies in Asia. Mahalo.
posted by Franklin Scruggins | 9:20 AM
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