The age of ‘Saudi America’

Thu Jul 18, 2013

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A game-changing US recovery has some major ramifications for the Asian hedge fund industry

By Aradhna Dayal

nullWhat a difference a year can make. In the US for my annual trip to meet investors and US-based Asian fund managers, I couldn’t help but marvel at the pace of the recovery in the country.

On the streets of New York, the mood is vibrant, restaurants are booked out and a quick lunch detour to Saks Fifth Avenue shows the store doing its briskest business I have seen in the past few years. Consumer confidence is clearly back in the US, backed by buoyant markets, bulging bonuses and a housing recovery that is touching one and all.

In the suburbs of Boston – the seat of old family money and home to some of the largest (and most understated) allocators – and in Connecticut, often seen as the mecca of hedge funds, housing inventory is almost nil, as asset-starved Americans lap up homes once again.

The manufacturing renaissance is well underway in the US, corporate are replete with excess cash on their balance sheets and states like Michigan are adding jobs for the first time in 30 years. The financial crisis and severe recession are a thing of the past and the buzz reminds one of evenings in Dubai.

Another game-changer that has allocators rooting for the US again is the low energy costs and the competitive advantage that it will get from low-cost shale gas. The country is already producing 23 million barrels a day of oil and gas – slated to increase to 30 million barrels a day by 2020, which will lower costs and increase exports exponentially.

This has two implications: every 10 cents that get taken off from the per-gallon gas price results in a $12 billion boost for the US government’s budget deficit; and, as the US becomes a net exporter of cheap energy, the government is likely to put a tax on it, which has the potential to completely wipe out the budget deficit. Not surprising, then, that in the investor circles, the US is jokingly being referred to as 'Saudi America’!

On an industry-specific note, the return of the US has significant ramifications for the Asian hedge fund industry. Not only have the fundamental recovery and galloping markets in the US turned US-based investors’ attention back to US hedge funds – a group that also brings with it a deeper pool of managers, wider experiences, scale and more institutional set-ups – but it has also changed the way that allocators want to play Asia.

While over the past couple of years, investors have made a beeline for multi-strategy funds and diversified portfolios in Asia, they are now looking for fundamentally-driven, highly-focused, strategy-specific funds in Asia.

Asian special situations, event-driven and even arbitrage strategies are much in demand among global allocators these days, as they look for differentiated ways to gain exposure to Asia. And among equity managers, there is a clear preference for those with high-conviction, concentrated portfolios.

As one allocator said, if he has to leave behind the familiarity of the US landscape and come all the way to Asia, he would rather have his money with a manager’s 10 best ideas than with that same manager’s five good and 20 mediocre ideas.

Manager quality, too, has emerged as a factor of paramount importance once again, as investors begin to measure Asian managers with the same yardsticks that they use for managers globally.

Several of the allocators I spoke to have removed specific Asia buckets from their portfolios and are instead placing Asian managers in the emerging markets or global equity pools, which essentially means that funds in Asia need to show the same level of credibility, track record and institutional set-up as their inter-national counterparts.

These trends are evident in the first-half 2013 AsiaHedge new funds survey, which shows that only managers with impeccable quality and specific strategies have been able to launch and raise meaningful assets this year. There has not been a single mega-launch so far this year, and while this may change in the second half, indications are that capital-raising will continue to be challenging. Overall, 32 Asia-focused new funds raised a little over $1 billion in assets in H1 2013.

In line with this focus on quality, we also feature in this issue of AsiaHedge stories on several high-potential new and upcoming Asian managers such as Jinxin Dai, Mack Kazi, Nick Zhang, Celia Farnon, Pradeep Swamy, Qiang Dai and Vijay Kumar.

Finally, the inaugural AsiaHedge China Forum is gathering steam and we bring you the latest on the high-profile speakers that will be taking part in this exciting landmark event in Shanghai on 12 September.

ISSN: 2151-1845 / CDC10004H

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