May last year saw Swiss headquartered fund of fund specialist Gottex Fund Management announce its purchase of Hong Kong based Penjing Asset Management, thereby creating the Gottex Penjing Asset Management, under new chief executive officer Max Gottschalk with about $700m of its $7bn deployed in Asia hedge funds.
While a quintessentially European company in culture, Gottex has expanded globally over the years, with an office in the US opening over a decade ago, and a representative office in Hong Kong from 2006. But the purchase of Penjing represented a bigger commitment to Asia. In an interview with Asia Pacific Intelligence, Gottschalk explains from Hong Kong: "More recently we felt there were unique investment opportunities in Asia. One of the key appealing opportunities in Asia is that global investors have been highly under-allocated to Asia for many years. This has been further accentuated since 2008 as investors in Europe and the US have focussed mainly on their existing domestic portfolios, giving Asia little attention, while the latter has grown economically in importance."
Gottschalk started out with the aim of building an Asian specific fund of fund offering to give Gottex's investor base in Europe and the US unique access to the Asian markets. All the sub funds in which Gottex Penjing invests for its four funds of funds are in the hedge fund space, making them one of the largest allocators to hedge funds in Asia. "Our core expertise is selecting the best local talent" Gottschalk says. "Investors seeking exposure here will be looking at long only but we feel there is a compelling reason to use hedge funds in Asia. Asian hedge funds historically have delivered good performance with less volatility than traditional assets."
The firm has a team of 24 people on the ground with nine full time investing professionals researching Asian asset managers across the region. "One of the markets that offer compelling investment opportunities today has been mainland China and its A share equity markets. If you look at valuation matrices, these are trading between 20 and 30% below their historical average, so they are cheap. We also have a strong allocation to Japanese equity markets, in the mid-cap sector in particular." Korea is beginning to look attractive but the political risks throw up a warning flag.
Gottschalk finds funds of funds compelling in Asia. "The industry is still very fragmented and many managers manage small sums of money so they require a lot more due diligence in terms of monitoring, but the smaller managers have been the ones that have generated the strongest and most consistent alpha, out-performing by 2-300 basis points per annum their larger peers."
Gottex Penjing will look at hedge funds with assets under management from $50m up to $250m. "At around the $1bn mark, performance starts to deteriorate" Gottschalk says.
As a manager of funds of funds, Gottex was, like many of its peers, affected by illiquidity issues through the financial crisis. "One of the most important lessons learned from 2008 is to make sure that the portfolio in which we are invested in offers better liquidity than the liquidity we offer clients" Gottschalk says. "There can be no mismatch between their liquidity and what we offer investors. We have also learned from 2008 to use managed accounts with underlying hedge funds when appropriate, in order to get better control and transparency."
While traditionally emerging market funds have had liquidity issues all of their own, Gottschalk finds that by staying with smaller managers some of those liquidity issues can be reduced as they can manoeuver through markets more easily, with a greater degree of flexibility than their possibly larger peers.
The Gottex Penjing investor base is 90% institutional, and drawn from all over the world. As a relative newcomer to Asia, Gottschalk reflects that there is a different attitude compared with Europe. "The sentiment is far more positive in Asia as the economies are growing. Although the capital markets in Asia have been highly correlated with US and European markets over the past few years, over the last six months we have seen correlation drop and investors are starting to look for opportunities to diversify again. Asia right now offers great value and existing under allocations to Asia mean investors will be seeking to increase their allocation to Asia over the coming years, and we do expect more flows into the region."
In dollar terms, the Penjing Asia Market Independent Fund returned 1.73% in January and was up 6.51% over 2012; the Penjing Asia Fund was up 3.04% in January, 10.01% over 2012 and the Penjing Asia Equity Fund saw performance of 5.04% in January, and 14.54% over 2012. "We have a strong start to the year, our performance is capturing interest from investors, momentum is growing and as long at the West does not give us negative surprises, the wind is in our back" Gottschalk says.
This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.