ARADHNA DAYAL, EDITOR, ASIAHEDGE
For many players in the Asian hedge fund industry, 2012 proved
to be a year of contrasts. While the year began on a rather
sombre note, and most managers missed the market rally in the
early part of the year, the mood changed dramatically by the
fourth quarter. Improving macro-economic sentiment around the
world, including a finale to US elections as well as the
resolution of several issues relating to the euro crisis,
brought cheer to the market. And this time around, Asian
managers were ready to capture the upside from the sustained
market uptrend. As a result, Asian hedge funds, on a median
basis, ended the year up 6.92%, leaving behind their European
and US counterparts, who ended the year up 4.83% and 6.49%,
respectively. Asia’s encouraging performance
continued in January and February 2013, and it seems likely
that investor conviction in the Asia story is back with a bang.
However, not all has been positive news. There has been a
significant consolidation going on in the industry. According
to the H2 2012 AsiaHedge Asset Survey, total industry assets
stood at $139 billion, which was a marginal fall over 2011, but
still a long way off the industry peak of almost $200 billion
that was reached before the global financial crisis.
ASIA EMERGES AS WORLD’S GROWTH
Throughout Asia, something more organic has been taking shape
and bringing back hope of a sustained recovery. To start with,
China engineered a successful leadership transition as well as
a soft landing of the economy. Then, Japan began showing signs
of reflation, leaving behind two decades of deflation, backed
by the progressive new Japanese prime minister, Shinzo Abe.
Widely seen in the region as a man of action, Abe is already
creating ripples with his policy to reinvigorate
Japan’s stagnant economy. In addition, the India
market, which has been battered for the past couple of years
due to policy paralysis, was reignited by the Indian
government’s renewed commitment to reforms.
Given that these three markets are the key growth engines in
Asia, it makes a strong case for a re-rating of Asia among
global investors. And it is having a doubly beneficial effect
for Asian hedge funds. First, it is bringing back the returns
to an alpha-starved Asian landscape, as shown by the
performance of Asian funds in 2012. Second, it is refocusing
investor attention on Asia once again, something that was
diluted in 2012 as investors chose to put their capital into
the rising home markets of the US and Europe.
BILLION DOLLAR CLUB GROWS
Asia’s home-grown billion dollar club continues to
expand, with firms such as China-focused Hillhouse, macro shop
Dymon and currency specialist Ortus gaining scale over the past
few years. An excellent boost to this pool of talent has been
the entry of new managers over the past two years, many of
which have gone on to raise well over $1 billion.
Azentus, launched by former Goldman star trader Morgan Sze,
as well as Carl Huttonlocher’s Myriad, are good
examples of this trend. Also featuring here are funds such as
Tybourne Capital, set up by former Asia head of Lone Pine,
Eashwar Krishnan, and Asia Research & Capital, founded by
the former Asia head of Perry Capital, Alp Ercil. Other
significant players in the market have been BAFM, launched by
ex-star Nomura trader Benjamin Fuchs, and GLG’s
new Asia long/short equity fund.
Other firms that have been growing slowly but steadily
include: China specialist Greenwoods, which recently crossed
the $1.6 billion mark; New Silk Road, which just joined the
billion dollar club; and London-based Asia specialist Stratton
Street, which has seen assets grow to $1.8 billion. All of
these firms meet the necessary global standards in terms of
capability, strategy execution, teams and risk management.
NEW ASIAN FUNDS HIT BY BARBELL EFFECT
While Asia-focused new fund launches raised a satisfactory
$4.74 billion in assets in 2012, most of the capital flowed
into bigger launches, reflecting the very high barriers to
entry. In pure asset terms, this is a 7% improvement over the
2011 figure of $4.43 billion and constitutes a record high
since the onset of the global financial crisis. But, if we look
closer, these numbers also reveal a pronounced barbell effect.
There were a handful of mega launches in 2012 that mopped up
most of the capital, leaving behind a heavy tail of small-sized
new funds that struggled to achieve scale.
Overall, the launches in 2012 showed considerable team
pedigree and institutionalised platforms. The very few large
launches of last year came from highly credible, star portfolio
managers that had worked at bank proprietary desks or had run
considerable capital at large global hedge fund shops. They
started with significant day-one capital, fully staffed teams
and offices that typify a world-class institutional launch.
Most of them scaled up quickly and either soft- or hard-closed
On the other hand, the smaller launches in 2012 mainly began
with internal or friends and family money, but struggled to
overcome the extreme challenges posed in gaining big tickets
and building up from there. A few positive developments
characterised the Asian launch space last year, however,
including an increase in product diversity – with
several credit, arbitrage, macro and multi-strategy funds
coming to the market. Also, Hong Kong continued to gain
strength as the preferred centre for new managers seeking to
launch their funds.
Looking ahead, 2013 seems to be shaping up well for the Asian
hedge fund industry. Risk is clearly back on the books,
leverage has returned and Asia funds are showing a good
combination of hedging and active capital deployment to make
the most of the rally in global markets. Managers are also
using active short books to glean alpha. More-over, a number of
managers are now employing a multi-strategy approach, which
allows them to extract alpha from different asset classes and
across market cycles.
Regulatory reforms sweeping across Asia could create newer
avenues as well as tools for hedge fund investing in the
region. These might include allowing the shorting of individual
stocks in China, the appearance of the first hedge funds in
India, the launch of the Qualified Domestic Limited Partner
(QDLP) programme in China, and a further opening up of the
Nevertheless, a number of concerns that many players in the
industry are worried about include the risk of inflation,
outflows from an overheating Chinese economy and a reversal of
reflationary policies in Japan.
FUNDAMENTALS AND PRODUCT DIVERSITY TO LEAD THE
The year will see a major comeback for research and
fundamentally driven investing, both in equity long/short and
long-biased strategies. Many of the veteran Asian managers
should perform well – given that market conditions and
the macro climate are benign again. In such an environment, the
fundamentally driven managers tend to outperform as they are
adept at stock picking and identifying growth companies.
In terms of strategies, there will continue to be a strong
influx of sector or thematic funds, such as technology-focused
funds and quantitative-driven funds. Technology funds enjoyed a
surprisingly strong 2012 and there is a widespread view
throughout the industry that they will continue to provide a
good sector diversification this year. Notable examples of this
trend are funds such as Seven Voyagers, MMA and Hong Kong-based
Also, quant funds such as Nipun, Arda and Alcova –
three new launches last year – have been making their
mark while other existing quant funds, such as Quantedge, have
been performing well and scaling up.
SEEDING IS BACK IN VOGUE
As a mark of increasing investor confidence in Asia, seeding
deals are once again beginning to appear on the Asian hedge
fund landscape. Two such deals have already been announced
since the beginning of the year, with the joint seeding
platform of NewAlpha Asset Management and Woori Absolute
Partners making a strategic investment in the Asian equity
fund, Mosaic Asset Management. Mosaic was set up by former
Brevan Howard and Trafalgar Capital manager, Tristan Edwards.
Also, FRM recently seeded Toby Bartlett’s
Japan-focused Arena fund. Overall, this is a positive
development for Asian hedge funds and could herald the onset of
increased channelling of capital to the whole range of Asian
managers, not just the larger players.