ARADHNA DAYAL, EDITOR, ASIAHEDGE
The first half of 2012 can well be remembered for the coming of age for Asian hedge funds – not just in terms of how they managed risk amid an extremely challenging environment, but also in terms of the capital-preservation skills that many of them aptly demonstrated. Seen as beta-chasing, largely long-biased managers for the longest time, Asian hedge funds are clearly undergoing an image make-over and are being seen as savvy, institutionalised managers capable of navigating down and up markets, and running active short books – both for hedging and for alpha generation.
The clouds of consolidation continued to hover over the industry, but several well-regarded start-ups also came to the market successfully, raising $2.02 billion in new fund launch assets in the first half of 2012. We believe that overall industry assets continue to be under pressure, with performance being largely flat (the AsiaHedge Composite Index was up 1.09% as compared to the 5.31% gain in the MSCI Pacific Free Net during January-July 2012).
While in 2011 total industry assets declined 8% to end the year at $141 billion, they climbed back up marginally in H1 2012 to end the period at $144 billion. Inflows into larger managers, both new and existing, neutralised the impact of shutdowns and near-flat performances that marked the industry this year. It remains to be seen if this trend will continue in H2 2012, as the macro picture becomes clearer after the US elections are over and a potential resolution of the European debt crisis emerges.
MIXED PERFORMANCE Interestingly, India-focused funds and Japan-focused funds – two markets that had seen a severe lack of investor interest for the past two years – rebounded towards the middle of the year. The AsiaHedge data reveals that India funds gained 4.38% and Japan funds returned 1.67% for the year to date to July 2012. Asia (ex-Japan) and Australian funds were the best-performing categories for the year to July 2012, delivering 4.29% and 5.82% returns, respectively, during that period.
We believe the second half of 2012 will see the strengthening of a few key dominant themes that AsiaHedge has been predicting for quite some time. The Asian hedge fund menu will continue to become more diverse, being spiced up by everything from global macro, currency and volatility arbitrage funds to fixed income and CNH (offshore renminbi) funds. Investors will look to play the Asian story in newer ways, and that means capital will flow into a diverse range of funds, apart from the historically favourite Asia equity long/short funds.
Multi-strategy funds are certainly strengthening their position as a dominant fund category in Asia, at least among start-ups. The recent AsiaHedge New Funds Survey shows that this fund category continued to be the most popular for asset-raising, accounting for $944 million or about 46% of all assets raised in the first half of 2012. This is similar to the trend that we saw last year. In terms of overall assets, while pan-Asia equity long/short remains the largest category by assets, this trend is slowly but surely changing, and we expect most consolidation to pan out in the long/short space.
Asia’s home-grown billion dollar firms will continue to grow and attract serious traction with global investors. This is a new phenomenon and augurs well for the entire industry because, prior to the global financial crisis, Asian funds found it difficult to achieve such scale. But the advent of seasoned, second-generation managers with highly institutionalised platforms such as Senrigan, Dymon Asia, Ortus, Janchor and Azentus – many of which are close to or above the multibillion-dollar level in asset terms – has changed all that. The addition of more credible new players, such as Tybourne Capital (founded by the former Asia head of Lone Pine, Eashwar Krishnan) Asia Research & Capital (led by former Asia head of Perry Capital, Alp Ercil) and ex-Nomura star trader Ben Fuchs’ new fund, has made the Asian hedge fund landscape even more interesting. The challenge for these managers is to deliver solid returns on their large asset bases, and prove to be all-weather, sustainable businesses.
CHINA’S QDLP TO BE A GAME-CHANGER
All eyes are on China as the country brings into effect its biggest regulatory reform, which for the first time will allow foreign hedge funds to raise assets in renminbi-denominated funds in mainland China and exchange the capital in order to make overseas investments.
Known as the QDLP (Qualified Domestic Limited Partner) scheme, the move is expected to allow up to 12 global managers to apply for these licences, and about four are expected to receive approvals in the first instance, and launch in the fourth quarter of 2012.
For most global hedge fund managers, this seems to be the Holy Grail, one that could lead to immense capital raising opportunities and also allow for significant capital sitting inside China to be brought out for investing. For Chinese investors, this could mean gaining access to alternative investment strategies – from short positions to arbitrage – which they have not been able to access until now.
However, the implementation is not expected to be as straightforward as one would think. To start with, the programme is expected to progress slowly and cautiously. In the first instance, only funds of hedge funds, rather than single managers, are expected to obtain the licences. Then, a low ceiling, around $5 billion, is expected to be placed on the amount that can be raised collectively at the outset.
Finally, only high-net-worth investors (and not institutional investors) in China will be allowed to invest with these funds at the initial stage. Despite all these uncertainties, the QDLP programme in China will no doubt be a game-changer in Asia.
We expect to see continued capital inflows into Asia as global investors correct their under-allocation to the region. Rising institutionalisation will change the inherently boutique nature of Asian managers, thereby ensuring tighter risk controls and operational platforms, and make them more investable for international allocators.
|Key stories from AsiaHedge in H1 2012|
|Asia’s biggest launch of 2012 reportedly closing at $940m – 24 August 2012|
Asia’s biggest hedge fund launch this year, Asia Research & Capital Management, is hard closed at $940 million
|More Asian hedge funds return money to investors – 22 March 2012|
Several Asian managers are throwing in the towel due to the tough investment climate and rising costs
|Saga Tree gears up for launch of Asia ex Japan strategy – 24 August 2012|
Singapore-based Saga Tree Capital is priming itself for the launch of its high-conviction Cayman-registered Saga Tree Asia fund
|India allows first hedge funds – 24 August 2012|
The Securities and Exchange Board of India (SEBI) has given seven alternative investment funds permission to operate in the country under a new regulation
|Nomura and Permal launch market-neutral Japanese equity fund – 19 July 2012|
Nomura and the fund of hedge funds giant, Permal Group, have launched a new Japanese equity market-neutral fund
|Factorial’s multi-strat flagship delivers over 10% return in first six months – 19 July 2012|
Star manager Barun Agarwal’s multi-strategy vehicle, the Factorial Master Fund, is understood to have delivered a double-digit performance in the rather turbulent first half of 2012
|True Partner blazes a trail in Asian volatility arbitrage space – 19 July 2012|
Hong Kong-based True Partner Fund, an Asian equity volatility arbitrage fund that has delivered 16.7% returns since its inception a year back, is opening to external investors
|Asian long/short managers abandoning shorts – 21 May 2012|
The strong rebound of regional stock markets this year is forcing many Asian hedge funds to seriously consider avoiding the shorting of single stocks and equity indices as a strategy
|Tiger Asia returning money to investors – 20 August 2012|
Bill Hwang’s Tiger Asia is returning capital to investors
|JH Whitney’s Japan advisory losing licence in Japan – 19 July 2012|
Japanese authorities have decided to strip hedge fund adviser, Japan Advisory, of its licence to operate in the country for allegedly breaching insider trading rules, creating a ripple of shock among hedge fund advisors and managers who fear more drastic action from Japanese regulators
|Veteran Ruan spins out of Asia to set up RAYS Capital – 18 April 2012|
Ex-Ajia man David Ruan sets up his own shop
|Mesirow establishes presence in Asia – 20 January 2012|
Chicago-based allocator Mesirow steps into Asia
|Ex-Goldman man Ghani teams up with Lone Pine veteran – 20 January 2012 |
Tanvir Ghani, the former head of capital introduction for Asia-Pacific at Goldman Sachs, is joining hands with Lone Pine Capital veteran, Eashwar Krishnan, to launch an Asia-focused hedge fund
out of Hong Kong