Going Long Is So Yesterday

"True originality consists not in a new manner, but in a new vision."

Edith Wharton (1862-1937)

Well done Boyer Allen! You have decided to tread in the considerable foot-steps that were first laid out many years ago by hedge funds the likes of Maverick, D.E. Shaw, AQR and numerous others. When the biggest issue related to growing existing institutional portfolios is that you do not have any long-only product why not create your own by simply decoupling your long/short equity offering and entering the space.

The trouble with this strategy is that the manager is now in the "margin vs. volume game" offering long-only, low margin products. It also now pits his product with a larger field of competitors, and guess what, those long picks might not outperform their respective active manager mutual fund peer group after all. Wouldn't that be ironic.

By effectively chasing beta, managers like Boyer Allen are conceding that it has been tough sledding gathering assets from institutional mandates in the post Credit Crunch world. After a period of poor performance that many suffered in 2008 it also raises the question whether investors are better served adopting the cheaper, passive ETF route than the expensive, active manager route that often fails to match the returns of the passive index on the upside.

Critically, the decision by Boyer Allen and other Asia equity market specialists is one of diversification and having a product that can sell regardless of the market cycle. They may be better served blending hedge and long-only products in "new ideas" rather than to churn out ideas rooted in active management that is fast being superceded by low-cost passive alternatives. Time for hedge fund managers to get creative and develop interesting, better performing ideas rather than changing the wrapping! If not, they will suffer from critics who contend that they are more often levered beta factories. Maybe they should simply focus on being better alternative investment in the first place. Mahalo.

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!

SWFs Going Single

"The perfect bureaucrat everywhere is the man who manages to make no decisions and escape all responsibility."

Brooks Atkinson (1894 - 1984)

The future of sovereign wealth funds (SWFs) in the single hedge fund business model looks bright. Reports from Bloomberg that Temasek Holdings, the Singapore-based investment house is about to launch a fund of its own should come as no surprise. Combined assets of the 60 or so global SWFs topped $3.8 trillion in 2008 with an additional $5.5 trillion in pension reserve funds, development funds and state-owned corporations.

Before we consider this as new money entering the business (as presumably they are in the best position to seed these new ventures) a better assumption may be that they are simply reducing their allocations to HFoFs. The reason for this may be related to: the bad performance of a vast majority of HFoF vehicles in 2008 (down at least 20%); gating and fee issues; and, the fact that many of these operations have now recruited a vast number of skilled individuals (mainly from multi-strategy single managers) and are now in a position to replicate those models on their own dime (or euro)! This cannot be underestimated.

Going single makes cents. It drives out the HFoF middle-man, it captures more of the hedge fund value-chain, and it could also lead to additional fees generated as some of these SWFs extend their models into the distribution of financial instruments.

The Asian opportunities are vast. With considerable financial muscle behind them it is conceivable that many of these SWFs will get access to illiquid or distressed, or even private equity-type of deal flow in the equity markets. Of course, to make this really scalable it requires that there be a massive upgrading in the exchanges and the hedging instruments offered not only in equities but also in fixed income as well as in derivatives. If not, this money will inevitably chase the limited number of deals in the developed world which though liquid, tend to offer a lower return on investment. In this instance, do not be surprised if these SWFs step up their activity in the ETF markets using leverage.

An interesting development will be how the international monetary authorities react to monitor the activities of SWFs across various markets such as recently via big positions in oil ETFs on NYMEX or in grain markets.

It may not be too long before the biggest and most aggressive multi-strategy funds in the world are those run by SWFs, and not traditional players like Citadel, D.E. Shaw, Soros or many others. The key will be to find a set of scalable investment strategies, which is no mean feat! Mahalo.

Asia's "Berkshire-Blackstone Octopus" Extends Reach

" I owe my success to having listened respectfully to the very best advice, and then going away and doing the exact opposite."

G.K. Chesterton, English writer (1874- 1936)

China Investment Corporation (C.I.C), arguably the biggest hedge fund and sovereign wealth fund in Asia, was recently revealed to be bulking up 4Q2009 assets on U.S. equities. The state-controlled operation which manages upwards of $2 trillion in China's growing forex reserves has been buying stakes in U.S. blue-chip companies many of which are liquid, and likely winning multi-national firms as the growth of the middle class consumer takes hold in the BICs (Brazil, India and China).

The $9.6 billion investments bring to light a new approach in the effort to diversify their U.S. exposure which up to now is/was focused almost exclusively on U.S. Treasury securities. It is a way to "recycle" their foreign exchange earnings which is becoming a very political issue these days. This is good news for the U.S. beleaguered stock markets that have been worrying about who has been buying at these elevated levels. Now we know.

The move also marks continued move away from relying on so-called foreign expertise by moving through large U.S. buyout/hedge fund or banking institutional intermediaries and to go direct in managing national assets. Expect more moves in coming months/years to take stakes in commodity trading operations, shipping companies or even trading exchanges as Asia's dominant SWF finds ways to exploit its growing "buyer power".

CIC will effectively evolve into some hybrid of a Berkshire Hathaway-Blackstone Octopus conglomerate with a footprint in every continent as it lays a foundation for China Inc. industrial foray abroad. They might want to consider hiring a U.S./European advertising company to grow a kinder-gentler global image too. Mahalo.