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Hedge Funds in Asia

Friday, July 16, 2010

Best Performance Bet in Asia: Mining, Infrastructure & Private Equity

"Study the past if you would define the future."

Confucius, Chinese reformer & philosopher (551-479 BC)

With global hedge fund performance looking at sub-3% returns through the first six months of 2010, a critical decision facing institutional investors may well be to ramp up private equity and infrastructure investing.

While the juiciest deals may be full there remain a healthy and growing supply of mid-tier opportunities. Top tier firms are oversubscribed in today's environment after a period of lackluster involvement by western investors. Blackstone, Carlyle and Bain are all in capital raising mode looking at Chinese yuan-denominated deal. For example, in the three years from 2005 PE fund raising rose from $2.1 billion to $12.2 billion.

Meanwhile, retail investors are parking their money in FX (the Yuan is a one way bet to appreciate) and high yield fixed income - which typically means the Asian bond markets where they can get relative certainty of return in well run companies.

That said, regardless of the state of the secondary markets in the region, straining infrastructure investments needed by rapidly urbanizing countries such as India and China may prove to be the better way to maximize investment NPV and IRR levels over the 30% territory.

Aside from toll roads, bridge-building and car parks there is the distribution and trade infrastructure such as port and storage facilities that will need to be funded, built and upgraded in order to provide the growing middle class population with imported foods, consumer and capital goods. These are simple macro issues that will need to be resolved. And while the investor's money may be held up in more illiquidity the payoffs are likely to be more consistent and predictable, features that make them very attractive for the region's institutional investors, SWFs and western firms too.

As part of this trend, commodities and especially the mining sector is one of the hottest places to be. According to data compiled by Bloomberg, commodity companies have announced US$362 billion of takeovers. Resource deals account for 28% of this year's US$1.26 trillion M&A market. This is twice their average share over the last 10 years.

So clearly, money flows will not be heading to Japan, as they did in the 1970s and 1980s. In fact, Japanese institutional investors (in particular, the public pension funds) should be entering a period of significant capital deployment throughout Asia, with an emphasis on scalable, high yielding project growth such as nuclear reactors, power stations and mining deals.

An ETF that invests in Asian infrastructure deals and or private equity projects might be sure-sellers to retail. Good luck to those firms that are shrewd and quick-witted enough to get that branded product to market first! Mahalo.

Thursday, July 01, 2010

Tough Long/Short Asia Times Coming

"The Markets can remain irrational longer than you and I can remain solvent."

John Maynard Keynes, British economist (1883-1946)

Global stock markets have started the first six months of 2010 on a very tenuous footing. Within Asia in particular, and per MSCI/BARRA data on a YTD basis, stock market performance has been largely negative: Australia -19.21%, Hong Kong -5.33%, Pacific ex-Japan -14.67%, Japan -3.53% and Singapore -3.43% to name a few.

The performance picture across hedge funds that trade Asian markets has also been largely disappointing. Most "winners" rode higher the spotty positive beta performance of Japan, only to suffer in May when the so called "risk trade" was taken off and monies fled stocks and flowed into U.S. Treasury bonds as a safe haven as well as into gold. Australia took it the hardest as the incumbent government made a high profile campaign to impose a stiff surtax on mining company profits.

According to the mid-June data accumlated on a number of hedge funds tracked by HSBC Private Bank in their Hedgeweekly #26 report, the average performance of Diversifed Asia equity funds was -1.53%, with some in China taking a particularly hard beat-down as the policy makers there have taken an increasingly hard line against inflationary pressures in on the lending side. This has inevitably led to a modest downward revision of domestic growth and production projections, which in turn has led to downside revisions in stock prices in the public markets.

That said, there have been a few positive stalwarts such as Bob Karr's $2.1 billion Joho Fund Ltd. which was +7.79%. Japan equity diversified funds returned +1.48% led by the Henderson Japan Absolute Return Fund Ltd +7.09%, while some bigger global players like Brevan Howard's Asia Fund Ltd returned -0.36%.

On a global basis, clearly there is still a lot of macro factor correlation with developed markets (which suffered heaviest over th elst 6 months - led by Europe). This goods and services correlation continues to bleed into the portfolio asset markets making the waves in Europe and the US still hit the shores of Asian markets. It will continue to do so, until, at least those emerging economies have a significant scale of domestic private spending and consumptoin driving their production engines. We are probably still a good few years away from that, although the time will come.

Until then, as developed stock markets continue to meander lower, the risks remain that Asian markets and in particular hedge funds with long/short equity biases will also go lower in terms of performance. Now more than ever, all firms need to establish differentiated marketing plans to grow and retain assets with a particualr emphasis on capital preservation. If not, they can look forward to a bleak capital raising future. Nuture long term, institutional investors. Mahalo!