Candy Cheung is a portfolio manager for the Asian portfolios for SAIL Advisors, one of Asia's biggest and most influential funds of hedge funds managers with $2bn under management. The firm was founded in the early 1970s as part of the Search Investment Group by Robert W. Miller, co-founder of Duty Free Shoppers ("DFS"), has been investing in hedge funds globally since the early 1990s and started investing external money in 2003. It now has over 30 employees in offices in New York and Hong Kong.
Alongside two global fund of fund portfolios, and a global emerging managers fund, the firm offers two Asian portfolios, one is a multi-strategy portfolio, where more than half of the portfolio is in equity long/short, and one is focussed entirely on Asian long/short equity managers. Cheung has been working with funds of funds and a focus on Asian long/short equity managers since 2005, and joined SAIL in 2010. Performance in the two Asian portfolios so far through 2013 is a return of 8-8.5% based on recent estimates.
"For us our long/short equity focus has always been more country specific, particularly focussed on China" Cheung says, where she has been researching hedge funds since 2005. "2008 was obviously very difficult and prior to that hedge fund volatility in Asia has been much higher but in the last few years the industry has evolved quite a bit with different types of managers in Asia due to an improved shorting capability in Asia, including China, and improved manager experience in managing hedge funds in different market environments."
Cheung has found that previously managers tended to come from a long only background and largely hedged using index futures. "Now they are more focussed on alpha generation and making money on both sides of their book" she says. "Quality has improved. Times have been tough but looking at managers who have been around for a while, their volatility has come down and returns have been more alpha-driven."
Cheung estimates that the investable long/short universe across Asia numbers some 300 managers, investing in some single country funds such as China, Japan, Australia and pan Asia managers and also some Asian ex-Japan funds.
SAIL likes smaller funds. "We are quite active in the smaller manager side in Asia" Cheung says. "We are on the ground and we believe we have an edge in finding new funds that are not well known yet and not big enough for larger allocators. We can add value to our investors by focusing on smaller and more nimble managers."
The firm's approach of identifying attractive managers in Asia early has worked well. "We like the opportunity of meeting with a manager early on" she says. We want to understand their investmentstrategy based on meeting with managers and their teams, looking at their investment philosophies and running a combination of quantitative and qualitative analysis. "We like to make sure we understand from their historical data where the return drivers have been to better assess the risk and reward of a fund."
SAIL finds most of its China-based hedge funds will have a research office on the ground in China but a main office in Hong Kong where trading activities are carried out. The choices of instruments for shorting have improved across Asia in the last few years, she reports with significant developments in single stock shorts rather than index shorts in particular.
"We like China managers, the number of good managers has increased and the quality has improved so the selection is broader. China managers tend to have larger research teams on the ground so there is more band width to cover all the sectors really well and identify opportunities as they arise."
Japan's return to positive numbers has not been missed either. "Japan has been a lot more on the radar screens recently but we started looking at it in 2010" Cheung says. "It's really down to the bottom up research process. In 2010 we found that there are good survivors in Japan. We saw a group of managers who have continuously done well through bear markets generating non-correlated alpha throughout."
SAIL started adding to their pool of Japanese managers in 2011, with some market neutral and trading orientated funds. "Now even these managers have captured the upside this year as market liquidity has improved" she says. "We continue to like Japan."
The recent rout in Japan with a 7% drop in the market tested their Japanese managers but she reports that they didn't lose much money, demonstrating that they are well hedged and enjoy a niche focus. " Our managers have shown strong alpha generation and good risk management" she says.
The smaller pan Asian markets are largely accessed through pan Asia managers as she finds the local markets are less liquid and don't have much shorting potential. Australia is included only as part of the pan Asia part of the portfolio.
This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.