The billion-dollar book

Mon Jun 20, 2011

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Boon or bane in Asia?


By Aradhna Dayal

nullIn sync with the sultry summer that June unleashes in Asia, the buzz around several marquee billion-dollar launches is heating up the hedge fund scene in the region. Whether it is Carl Huttenlocher's much anticipated Myriad, Seth Fischer's Oasis, Morgan Sze's Azentus or even the highly secretive China-focused Principia, investor expectations from these new-age, institutionalised funds are running high.

Adding to the excitement is the rapid scaling up of a handful of seasoned, second-generation managers such as Danny Yong of Dymon Asia, John Ho of Janchor Partners, Gen Kato's MAM, Prime Capital and Nick Taylor's Senrigan. In the past year, all these funds have reached $1 billion and are soft- or hard-closed. Together these two sets of new entrants have given rise to Asia's first true blue, indigenous (post-crisis) Billion Dollar Club - a watershed event AsiaHedge has been predicting since the advent of the highly promising start-up class of 2009.

However, instead of a feeling of euphoria, I sense a certain caution among the investor community. The million-, or should I say, billion-dollar question it seems to be: can a billion-dollar book be effectively deployed in Asia and can these managers continue to glean the alpha that they generated over a much lower asset base? Are the Asian markets deep and varied enough to sustain investments of this magnitude or will it result in a disappointing tapering off of performance that takes away the edge from Asian investing?

In short, the billion-dollar book - is it a boon or a bane in Asia?

Sitting in Asia, we would very much like to believe that it is the former. One only has to look at the soaring trading volumes, growing market capitalisations and listing of global companies in the Asian equity markets, to realise the investment opportunities they are unleashing. Add to that the emergence of a true multi-strategy approach now in Asia (as against mainly long-biased equity funds earlier) - a route several of the billion dollar-plus Asian hedge funds are now taking - and it is clear that there is enormously greater flexibility and opportunities for returns than before. As these funds start combining CBs, credit, rates, FX, equities and even activism to switch across asset classes and generate alpha through market cycles, it automatically builds in additional capacity that simply could not have been contemplated five years ago.

A look at the Asian FX and rates markets tells a similar story. The FX market in Asia has grown between seven to 10 times over the past five years and trading volumes (estimated at around $400-600 billion a day at present) have skyrocketed. There are also now several Asia-based macro funds trading global currency markets (hence widening their universe), making it entirely possible today to produce healthy 15-20% returns purely from trading Asian currencies. Dymon Asia, which is up 14% year to date, is a classic example.

An acceleration in M&A and corporate activities is also opening up huge investment opportunities, particularly for event-driven funds. Asian governments have also fostered a credit culture to deepen local debt markets, which has been a boon for fixed-income focused Asian hedge funds. Plans to develop newer avenues such as an integrated regional market for local currency bonds will facilitate greater scale, efficiency, and access for many of the region's fledging bond funds.

Finally, firms such as Janchor Partners have led the way for taking in only long-term, committed capital, which gives them the luxury of deploying a large asset base for the long term.

Allocators will also likely tweak their yardsticks to better reflect the changing dynamics in Asia. There is little doubt that a $2 billion fund generating 10% per annum cannot be compared to a $50 million fund returning 40%. A higher focus, therefore, on asset-weighted returns as well as the longevity of the brand, overall business and performance, will likely become the norm.

Reflecting this theme, we bring you news and features on Fortress, Charlie Chan, Oasis and Sparx - players managing large portfolios in Asia - in this issue of AsiaHedge.

The June issue also carries a synopsis of our latest Roundtable, titled 'Going global: Singapore's evolution as a key international hedge fund hub', which brings together some of the sharpest minds in the Lion City's hedge fund arena. Finally, a special feature on China showcases some of the newest opportunities in that market today. Happy reading.

ISSN: 2151-1845 / CDC10004H