Too big to fail, or too boring to succeed?

Tue May 18, 2010

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The excitement never seems to end these days in global markets

By Aradhna Dayal

The excitement never seems to end these days in global markets! As I watched the Goldman saga unfold – and saw one of the most 'blue-blooded’ of banks on Wall Street get embroiled in SEC charges – I began wondering what it means for Asian hedge fund managers. That it could be the beginning of a regulatory tsunami and therefore result in a dramatic change in the regulatory landscape for hedge funds globally, including Asia, seems quite plausible. But the key question is: are the investors rewriting their risk taking and manager selection strategies as we speak? And is the insistence on allocating only to large managers, with highly institutionalised platforms and low-risk, moderate-return, liquid fund strategies, really prudent in the context of Asia?

When it comes to institutionalisation and robustness of compliance, risk management and operational systems, it doesn’t get any bigger than Goldman. Or at least that was the perception. But with the US bank facing charges of non-disclosure and potentially setting up investors to fall, one wonders if today 'big’ is really beautiful or more a case of the big bad wolf coming to your door. And building your house for you!

Anecdotal evidence confirms that investors are channeling their capital into a relatively small number of large Asia-focused hedge funds, with many being part of a larger international fund shop. But this makes me wonder of course whether this is killing the entrepreneurial spirit of Asian hedge fund managers? After all, the Asian hedge fund industry was started out by boutique hedge fund shops, typically formed by truly "alternative" individuals who refused to be boxed in by large prop desk or institutional set ups, and wanted to be true alpha generators with the freedom to take risk as they saw fit and express their views in alternative asset classes/styles they found most promising. In other words, will a new focus on ticking the boxes keep investors from thinking out of the box and picking true alpha producers in Asia?

It is of course critical in today’s environment for investors to "hedge" themselves and make sure that their returns, liquidity and risk appetite goals match the managers they select. But the fact is that Asia, being an emerging markets and relationships driven-region, has historically produced the best results from strategies that have not been afraid to take risks, play the volatility and invest in slightly illiquid spaces such as private lending. So if investors turn even more conservative in the wake of the Goldman charges and the Greece fallout, is there not a serious danger that capital-strapped Asian managers will find themselves losing their risk appetite and perhaps lose their alpha producing 'mojo’?

Investors in Asia will therefore have to decide whether they want alpha generators or quasi-absolute return managers, because the latter is what they will likely get if the managers feel that every investment they make and every dollar they have under management is conditioned upon no drawdowns. I feel that if investors just care to put aside exhaustive check lists for a moment, they will find that there are surprisingly many true high-quality, operationally sound, albeit smaller-size hedge fund gems in Asia, that are not afraid to delve into asset classes more esoteric than equities, such as private credits, capital structures and commodities. And often they operate in markets such as Japan, Vietnam and India, which barely a couple years ago were being written off. This way, investors will not only avoid performance disappointment a few years down the line, but also build a nice alpha return cushion to ward off being wiped out by a 'Black Swan’ type tail risk, which in today’s high volatility, sovereign risk kind of environment, is a real possibility.

Reflecting that, in this issue AsiaHedge features Sydney-based manager Prodigal that has built its business on innovative strategies, and a Q&A on the changing fundamentals of Japan.

We also look at the new-age regulatory framework that Singapore is trying to put in place for hedge funds, to make itself a globally-competitive hedge fund centre.

The highlight of this month’s issue is a candid Q&A with Harvey Pitt, former chairman of the US Securities and Exchange Commission and now CEO of Kalorama Partners, whereby this astute and straight-shooting consultant assesses the Goldman situation and Volcker proposals, and advises on how Asian hedge funds should navigate the ensuing regulatory storm.

Finally, this issue reveals the AsiaHedge 2010 Prime Brokerage Survey, which over the past few years has evolved into an important industry benchmark of the state of play among PBs in Asia.

ISSN: 2151-1845 / CDC10004H

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