Asian hedge fund specialists GFIA estimate that there are now 760 funds dedicated to Asian markets. The firm comments: "Out of the reporting managers, 481 are run out Asia. As the competition for scarce asset intensifies, a significant number of previously "under-the-radar" managers have registered themselves on hedge fund databases to raise public exposure." However, they also note that a noticeable number of very small funds have ceased to update their profiles on databases. "We suspect this is either due to poor performance, or the time lag between liquidation and being eventually classified as such on databases. These managers are not necessarily leaving the industry, but are consolidating with larger managers, or closing the fund management entities to focus on managing proprietary capital. We are also aware that a number of the very large funds increasingly prefer not to report to databases; the transparency of the Asian hedge fund industry continues to decrease. Funds which are closed to new money also do not have any incentive to report."
GFIA reports for the first half of 2013, they saw six new launches and 10 closures. "The new launches were mostly small start-ups focusing on long short equities. In terms of closures, we saw relative value strategies retreat the most relative to the size of their strategy buckets, although long-short funds saw the most exits in absolute numbers."
The firm comments that 2013 continues to be a difficult year for fundraising for startups as investors have gravitated decisively towards bigger and established funds. "This year, we noticed a marginal increase in the number of firms with AUM between $200m to $499m as well as $50m to $99m. This coincides with our observations that "mid-sized" Asian funds, especially Japan and China focused ones, are now at last seeing marginal inflows since the start of 2013."
GFIA says that of the 618 funds that report AUM regularly, 297 of them have less than $50m under Management. "The absolute minimum level which we estimate management fees can support the operational expenses of a typical boutique in Asia before salaries - although this figure has likely increased over the past few years. $100m continues to be the minimum hurdle which, in our experience, must be met before majority of investors are comfortable to make allocations (and staff can be properly paid). Currently, there are 226 funds with at least $100m under management and this means only about 37% of the industry is of any interest whatsoever to professional allocators. This, however, is a 9% increase from the 28% in 2012."
The first half of 2013 saw a sharp increase in the percentage of Asian funds run from within Asia, in particular out of Hong Kong and Singapore. "We suspect this influx of fund managers into Hong Kong is probably due the proximity of the city to mainland China which is experiencing a slow but revolutionary regulation change in the Chinese securities investment fund laws. Managers are able to register private funds independently without going through a trust company structure and they can also, in certain jurisdictions in Shanghai, under the Qualified Domestic Limited Partners (QDLP) program raise money domestically in China. Thus, we also expect an increase in number of funds running out of China in the near future."
Other highlights include:
The firm writes: "Intuitively, one would expect managers based in the region to have better access to information, and therefore better performance. Our research, and that of others, reveals consistently that empirically, this is mostly true. Overall, GFIA believes that continued asset growth of the Asian hedge fund industry will be driven by large indigenous managers, or the locally established desks of global firms, as size does matter in this game of survival. Investors are clearly prepared to forego some level of performance and fiduciary comfort, in return for the size and "institutional" organisational structures."
GFIA believes that the industry's unwavering march toward consolidation is both a symptom of the tough fund-raising environment, and the result of the pressure to institutionalise brought to bear by regulators, as well as investors' nervousness expressed as a preference for the large over the excellent.
The firm concludes: "Hedge fund investors are themselves shifting towards the institutionalised end of the spectrum, with the highest ever concentration of hedge fund assets coming from the largest allocators: 46% of the global industry comprises investors with AUM in excess of $10bn. This is certainly a contributing factor in the dominance of large funds globally, and also in the increasing importance of operational due diligence (ODD) processes. At least two other prime brokerages have issued investor surveys highlighting the strong emphasis on investing in people and process, regulatory and compliance framework, and independent governance - all areas in which Asian managers are perceived to have room for improvement. The fate of Asian hedge funds is irrevocably tied to that of their underlying equity markets; Asia, like other EM, has disappointed investors this year (with the probable exception of Japan). Accordingly, the biggest swing in investor appetite in 2013 is away from emerging markets focused managers, as both EM equity and EM credit suffered negative moves in sentiment since the beginning of the year. According to Credit Suisse's July 2013 investor sentiment report, Asia Pac- and EMEA-based investors both indicated net redemptions from EM strategies, while conversely investors from the Americas showed continued net interest. Strategy-wise, the most popular strategies across regions were long-short equity, event-driven, and global macro with high net demand. Long-short equity in particular has been the focus since the start of 2013. Additionally, both Japan and China managers have seen renewed interest and actual tickets from overseas investors, and remain the two linchpins of global allocators' Asian portfolios."
Turning to performance of hedge funds in the region, in their October performance notes on hedge funds in Asia Pacific, GFIA reports that Asian markets rebounded over the month on the perception that the Fed is kicking the tapering can down the road. MSCI Asia ex Japan surged 5.6% while the AsiaHedge Asia ex Japan pocketed half that return, the firm writes.
"September was a positive month for most Asian local bond markets. AHP Asia Credit Opportunity Fund (1.6%) benefited from the portfolio manager's decision to reduce its cash position, and increase gross spread exposures by adding cash bond investments in selected sectors. Bluewaterz (0.6%) saw a 1.0% contribution from its credit positions whereas the credit hedge position dragged down the performance by -0.4% amidst the market rally. Saka (0.4%) had a relatively flat month despite the market rally and outperformance from its new position in the Indonesian Sukuk (dollar-denominated Islamic bonds)."
GFIA found that event-driven strategies continued their strong outperformance in September, with many of the managers continuing to deliver respectable returns. "Late stage, hard catalysts transactions have contributed handsomely to Athos Asia Event Driven (1.24%) fund which continues to see a high gross exposure (360%) given the expected healthy number of M&A closures over the remainder of the year. York Asian Opportunities (2.0%) continues to churn out remarkable returns from their special situations book with China and Japan being the two main performance contributors. Ardon Maroon (4.1%) also derived 2.5% from Japan hard events and overall, the portfolio has 36.7% and 62.0% in hard and soft events respectively."
The firm found that Macro and Multi-strategy managers also did well given the favorable reversal of the macro environment. "Looking forward, most managers expect fourth quarter to be a relatively stable, moderate growth macro environment in Asia with the forward expectations of US interest rates being the main factor risk in the region. The unusual volatility and pricing dislocations in the Asian markets generated opportunities for some managers. RV Capital Asia Opportunity Fund gained 1.7%, benefiting from well-positioned rates dislocation book. BFAM Asian Opportunities Fund (2.8%) also benefited from this off-balance market as the manager added risk and duration in Indonesia and Indian high grade credit space with the view that the Fed was going to do minimal to no tapering. Azentus (3.0%) finally reaped the fruits of its recently simplified and concentrated portfolio which will continue to focus on the equity long/short and event books.
A slowdown in ASEAN has helped reduced the region's current account deficits, says GFIA, and managers are generally focusing on countries that are less dependent on foreign capital, such as Thailand and the Philippines. "Absolute Partners Fund (0.7%) generated significant gains on the long side of Rupee and various ASEAN currencies. Directional funds generally rose with the tide this month. One North (3.1%) has been building up its exposures by adding several Thai and Singapore names into its portfolio. The fund ended the month 63% invested in 29 positions. Doric Asia Pacific Small Cap Fund (0.4%) did not take part in the rally as its portfolio has been short and has avoided those so-called "beaten" down stocks which were the main beneficiary of the rally.
This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.
Asia Pacific Intelligence
Thursday, November 07, 2013
GFIA believes Asian hedge fund success lies in the strength of the underlying markets