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 allocations.
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 through shorts.
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.