By Aradhna Dayal
I recently returned
from an extensive trip to Central Asia and Europe. En-route to
the legendary EuroHedge Summit in Paris, I took the opportunity
to sit down and talk informally with some of the oldest asset
allocators in the region. These included family offices,
private banks, institutions, fund of funds and asset managers -
investors that have had Asia on their radar way before the US
allocators, seeded some of the earliest Asian managers, and
have witnessed first hand numerous market cycles and their
impact on Asian investments.
Notwithstanding the fact that a slew of regulation such as
FATCA seems to have turned Zurich into a virtual ghost town,
even in other European destinations, investor disenchantment
with Asia as a region and with Asian managers was clearly
evident. Only a handful of allocators have maintained their
investments in Asian hedge funds and even that often forms a
token or miniscule part of their portfolios.
Some investors are simply buying Asia exposure through index
tracking funds. Others, in particular family offices, prefer to
make direct investments in interesting projects in markets such
as China. And most asked me for recommendations for absolute
return, fundamentals-driven, long-biased managers that
understand Asia - and allow investors to play the region's
growth story in a simple and effective manner.
Then there is the question of costs. The street keeps
buzzing about news of consolidation at manager level, but I
feel a bigger consolidation is happening at an investor level
(at least when it comes to Asian managers). Stung by poor
performance, rising regulation and fickle markets, investors
are scaling back (on cost, personnel, time and travel it takes
for vetting hedge funds), increasingly preferring to pool
resources and either create bespoke funds and/or managed
account or identify niche projects to invest in.
One family office I spoke to said that they have managed to
get their costs down to 30bps while getting similar exposure as
through a portfolio of hedge funds before - a startling figure
that challenges the whole 2 plus 20 fee model.
A look at the performance of the Asian hedge funds clearly
explains why. The AsiaHedge Composite Index is down again for
April (-0.38%) after a tough March. Initial talks with managers
reveal that May might be a brutal month again for Asian hedge
funds, threatening to wipe out the 4.16% year-to-date gain the
index has shown so far for 2012.
In all fairness, Asian hedge funds have not done too badly,
effectively holding their own (flat to marginally down) against
free falling markets, but from an international investor's
perspective, this continued streak of lukewarm performances may
not necessarily justify the geographical, currency, political
and volatility risk (apart from the usual manager risk) they
take in Asia.
Then there are overhanging clouds of possible further 'black
swan' events (the astonishing JP Morgan prop trading scandal
further ruffling feathers), potential exit of Greece from the
Euro, and a new socialist President in France, and we can see
why investors would want to stick to familiar ground.
Which is why I feel that nothing short of a revolution is
required for Asia-based and Asia grown managers to survive this
confidence and capital crisis - and to re-ignite their appeal
for investors who are turning increasingly tactical in their
Firstly, Asian managers need to modify their product mix and
add more low-cost, long-biased strategies (perhaps in
UCITS-compliant versions) to their staple hedge fund offerings,
something players such as Value Partners and Martin Currie are
doing already. Creating bespoke products for pools of families
or like-minded investors can be another solution. Adding more
active short books will also help justify the fee structures on
their existing hedge funds. Some China-focused managers, such
as Dragon Billion and Golden China, are perhaps good examples
of this, with many reaching maturity in alpha derivation
Finally, and most importantly, Asian investors will need to
expand their investment horizons to global opportunities in
currency, real estate, energy, equities and credit areas. Shale
gas, for example, has the potential of changing the global
dynamics once again, and many Asian managers I speak to are
already eyeing opportunities that it would throw open.
We feature visionary managers such as EIP, which are doing
this and much more, in the May issue of AsiaHedge. We also turn
the spotlight on consultants that are now playing a key role in
allocations to Asia. Finally, our annual Prime Brokerage Survey
captures the changing landscape for prime broking banks in
Asia. We hope you find it an engaging read.