By Paul Storey, editor
As a new year begins, it is time once again to take up the cloth on the crystal ball and gaze into its depths to try and gauge some meagre measure of what the next 12 months might have in store for us.
All depends on whether resurgent economies, in Asia especially, can take up the slack left as the global quantitative easing end-game plays itself out. If so, then 2010 looks like it could be a time to build on the gains of 2009. But if not, then the term 'double dip' once again becomes something more than a reference to a particularly rich type of chocolate ice-lolly, with 2010 seeing a return to some tougher times. Double-dip recessions have happened before in Asia of course.
Looking backward often helps with gauging what might lie ahead. In the end, 2009 turned out to be quite a good year. The MSCI Pacific Index put on 24.18% while the ex-Japan index made 72.81%. Much was said yet again about Asia's ability to turn on a sixpence. But this sort of view can also be regarded as somewhat simplistic. After all, pump massive amounts of liquidity in to the global financial system and stockmarkets are invariably among the major beneficiaries.
So let's be completely clear here. But for the concerted efforts behind quantitative easing, many Asia-Pacific hedge funds could well have met their nadir in 2009.
With a need to focus on their own operations and in the face of a surging bull market, many managers may not have appreciated the full extent of the hit that the industry took over the period of the credit crunch. This is best exemplified in a conversation I had with a Singapore-based manager towards the end of last year, who was convinced that the number of fund closures suffered within the industry through the period of the crunch numbered no more than the fingers of two hands. In truth about 200 Asia-Pacific funds closed down over less than two years. That's twenty pairs of hands, which makes for quite a difference.
Add in that the industry's assets under management slumped from nearly $200 billion to a low of about $120 billion during 2009 and you can see more clearly how bad things got.
There are indications now that capital has been returning to the region, and specifically to hedge funds, but this too needs to be regarded in a proper perspective. Yes, some houses are taking in capital, and large amounts of it in some particular instances. But the truth of the matter is that the vast majority of Asia-Pacific hedge fund managers are not seeing significant inflows of capital by any means, at least not yet.
Take a look at performance too. Despite the strong performances that characterised 2009, the fact of the matter is that the majority of fund NAVs still languish below their high water marks. By the end of November 2009, just 22% of the regional industry's funds had got back above their high water marks. The balance of 78% were still below and at a median distance of -11.3%. That will have improved a little more after another good month in December, but it is clear that a lot of funds still have a long way to go.
The suggestion is that it will not take too much more of the good times for the majority of hedge funds in the Asia-Pacific to pull themselves back above their former high water marks. Yet the data also highlights the fragility of the industry's recovery so far - even after a period of strong markets.
Given that these are the facts, there seems little need for a crystal ball really. Whatever the markets might do in 2010, the Asia-Pacific hedge fund industry needs to do more, much more probably, to get itself into decent shape to deal with the next downturn when it comes - as it surely will, sooner or later. The disconnection between the make-up of many managers' investments, and the make-up of their capital bases, remains as big a problem as it ever was. A number of other issues linger too, such as risk control and transparency.
In a regional industry characterised by boutique hedge fund operations, more managers need to be taking notice of what needs to be done - first, to prepare for any possible market downturns; and second, to build more balanced operations for the future that take into account the changed market environment. In this regard, the longer the bull market lasts in to 2010 the better. The Asia-Pacific hedge fund industry still needs more time to get into better shape for the future.