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 ENGINE
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 their funds.
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 Korean market.
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 WAY
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 Sylebra.
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.