Braving the storm

Wed Jun 20, 2012

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Portfolio managers are battening down hatches in anticipation of choppy waters


By Aradhna Dayal

nullObservatories around Asia are predicting an unusually long and heavy typhoon season this year, thanks to dramatic shifts in weather patterns globally. Strolling along the Victoria harbour, one can easily see the ominous clouds that engulf the stunning Hong Kong skyline almost every afternoon, and boats – all the way from humble sampans to luxury yachts – battening down hatches in anticipation of choppy waters.

Back at the desks of most portfolio managers in Asia, the scenario is not very different. May proved to be an excruciatingly tricky month for Asian hedge funds, with declining markets threatening to wipe out the year-to-date gains that had been so painstakingly cultivated by funds in the first quarter.

The worsening macro storm this time came from within the region, with beleaguered India on the brink of losing its investment-grade status (in its recent report titled Will India be the first BRIC fallen angel?, global credit-rating agency Standard and Poor’s hints at the pos-sibility of a downgrade of India’s sovereign credit rating to 'speculative’). Back in Europe, an escalating threat of Greece’s disorderly exit from the euro (and talks of Spain and Italy being next in line) has sparked off major fears of a systemic risk crisis once again.

What has impressed me, however, has been the surprisingly effective downside and capital-preservation skills Asian managers have shown this time round – so far at least. The AsiaHedge Composite Index was down 2.99% for May, bringing the year-to-date industry performance to 0.94%. While these may not be very impressive numbers on their own, compare them to the benchmark figures (the MSCI Asia Pacific lost 10% in May and 1.32% year to date) and we can begin to see why there has been no significant capital exodus from the region despite tepid performance this year.

A combination of factors is at play here. Firstly, this signals a new level of maturity in the Asian hedge fund space, both at a structural and investment process level. Structurally, the industry has gravitated towards larger, more institutional-size hedge funds due to the ongoing industry consolidation and rising barriers to entry that facilitate fewer but mostly bigger launches today. Most of these firms tend to be multi-strategy and are able to nimbly allocate capital between strategies and asset classes depending on the market conditions.

Also, the profile of a typical portfolio manager is radically different from what we saw five years back. Most successful Asian funds today are run by second-generation hedge fund managers that have branched out from large international or local hedge fund shops, have deep experience and practise seasoned investment processes, risk management and active shorts to counter tough market cycles.

Given this background, AsiaHedge turns the spotlight in this issue on several such highly experienced Asian managers that have preserved capital over various market cycles, and are growing their existing funds or launching their own ventures. These including Alexander West’s Blue Pool Capital, Australia-based MST Capital, RG Investment Capital, Toby Douglas Bartlett’s Arena Capital, Expedition Advisors and Crescent Hill Capital.

AsiaHedge will also be increasing its focus on performance stories starting this issue, featuring strong outliers on both sides. This month, we feature managers such as systematic commodity trader Earth Element Fund (up 7.55% in May) and Quantedge Capital (up almost 22% this year by end-April).

Also in line with increasing investor demand for non-correlated strategies such as credit and macro, we bring you a detailed report on the emergence of Asian credit strategies and the opportunities and challenges that managers are seeing in this space.

Finally, continuing with the tradition of AsiaHedge Q&As, we bring you interviews with two of Europe’s best-known industry figures: Michael Hintze, founder and CEO of London-based CQS, and Peter Fletcher, managing director of Swiss family office Parly Company S.A. Hintze talks about CQS’ evolution from a convertibles and credit house to a multi-strategy firm, as well as the issues that are reshaping his corporate and investment strategy today. Fletcher, a pioneer of Asian seeding and allocations, discusses the changing mindset and investment strategies of European family offices today.

In addition, this issue carries our annual fund administration survey, showcasing the state of the market in this important area of the industry today.

ISSN: 2151-1845 / CDC10004H