Global Multi-Strategy Funds Target Asia: Coming or Going?

"Such is the inconsistency of real love, that it is always awake to suspicion, however unreasonable; always requiring new assurances from the object of its interest."

Ann Radcliffe

author & benefactor of Harvard, 1764-1823

The hedge fund industry carousel is back in full swing. With well-known media outlets reporting in recent weeks that the world's largest multi-strategy hedge funds are looking to open up offices in Asia should one assume that this portends another Golden Age of industry growth? The short answer is perhaps, while a long term answer is less clear.

The first time around, in the 2003-05 time slot the main driver was Japan. At that time the macro play for many of these players was made available by the BoJ backstop to the Japanese banking system. At that time with the prospects of nationalization not on the cards and the government priming the economy (albeit temporarily) there was a wave of activity in M&A, investor activism, IPOs and overall volumes of equity contracts traded on the TSE, Osaka and on other regional exchanges.

Famous names like Citadel and SAC routinely accounted for 3-5% apiece of the market cap of all stocks traded on the TSE across most sections. In fact, many of these global funds typically accounted for close to 60%-70% of all capital in Japanese equity markets. A common misconception had been that most capital came from Japan-specific long/short funds.

At this time too, Japanese banks making road-shows in the U.S. and overseas also started to visit hedge funds in order to find out what motivated these "new and active" stock investors in their own stock and in the markets in general.

Fast forward seven years later. Japanese stocks are anaemic with slim prospects of any rebound. The national finances are a mess with debt levels at historically high levels. There are few to no IPOs and activism is dead. The nanny state has taken over and yet high taxes and bureaucracy remains an unsavory way of life. And for stock pickers Japan remains the archetypical "value trap". So what are these managers chasing?

This time around, big names like Moore Capital, Maverick, Stark and Viking are looking at China, Hong Kong, Indonesia, Singapore, Malaysia, India and Australia prepping for growing equity markets, potential M&A opportunities and large scale event driven: distressed security plays. Chances are, they are not looking at Japan!

The fact is that many have already been in Asia and closed up their offices in some cases less than 24 months ago. But now, with the prospects in the U.S looking less than stellar heading into a double-dip recession it is as much a reaction to the lack of potential opportunity in the U.S. that is seeing this renewed interest overseas.

It remains to be seen if this is another temporary interlude before even these Asian markets start to have their own "bubble blow-ups". In the event that happens, watch for money to flow very quickly back into the most liquid instruments in the world - U.S. Treasuries - while the night desks in New York and London start whirring again as the lights are turned off again in Hong Kong and other regional locales as these big shops look again to protect their respective bottom lines.

As we have preached before, Asia-based exchanges and monetary authorities should be looking at this opportunity to increase transparency, improve access to hedging instruments, kick-start local fixed income markets and to lower transaction costs and paperwork for many of these necessary liquidity providers. If not, many of these hedge funds that are coming will soon be going. Mahalo!