History has a horrible habit of repeating itself. But where it was bank risk that threatened the global financial system in 2008, now it is sovereign risk that is rearing its ugly head. At the nub of the issue, the markets are now questioning a true valuation of the Euro, focusing on the issue of Greek, Portuguese and Spanish debt as the catalyst. Sounds familiar?
Simultaneously, the markets are also being faced with the possibility of a return to global recession. For hedge funds, things do not apparently get much better. The industry is coming under strong pressure in Europe and according to President Obama's most recent railings against Wall Street, the hedge fund industry does not feature too strongly on his list of the favoured either.
It was in the October 2008 edition of AsiaHedge, at the height of the Credit Crunch, just following the fall of Lehman that we wrote the following:
So when the forces of the markets and politics have had their way, what will be left? Will Asia, led by Hong Kong, Singapore... emerge as an equal player in a vibrant, properly and realistically regulated global industry? Will the region simply become a refuge for the scattered remnants of a battered and much derided band? Or will there even be little or nothing left?
Looking at the situation now, neither of these possibilities seems inappropriate yet, although the third scenario seems by far the most unlikely. Indeed, there remains a decent possibility that Asia really could begin to play a much bigger role within the global hedge fund industry than it has done in the past.
Were it to do so, there is a strong chance too that Hong Kong and Singapore would be thanking their lucky stars, much like London must have done following the creation of the Eurobond market.
And were a European or US-based manager ever to have to move out eastwards, doubtless he or she would find a vibrant and solid, though undercapitalised industry. With its long lines of supply, the Asia-Pacific has traditionally been something of a desert, capital-wise, for hedge funds.
But perhaps this is too negative an approach. There is a raft of benefits after all.
Excessive amounts of capital can make for flabbiness, and a loss of hunger. As the market leaders in the West have grown larger there has been a tendency for them to move towards the financial mainstream. That's normal to expect, but it is hardly 'alternative' is it? And, after all, it is hedge funds and alternative investment that we are talking about here.
The Asia-Pacific hedge fund industry, by contrast with the bigger western markets, continues to reflect those types of qualities. A key factor lies at the heart of this. Based on our asset surveys, back in 2000 the average size of an Asia-Pacific hedge fund was about $100 million. This had doubled in size to $200 million by the end of 2007 at the industry's peak, but has since dropped back sharply to about $140 million at present. What's more, given that many of the regional industry's largest managers remain headquartered in the West, the average size of an Asia-Pacific-located hedge fund is actually even smaller than the current industry-wide average.
In short, the Asia-Pacific hedge fund industry is one that is still dominated by smaller investment boutiques, a characteristic that has not really changed that much over the past 10 years. So if anything, the market right now in the East still looks very similar to the scenario in the European hedge fund industry at the beginning of the noughties, just before it took off.
Surely a boutique-heavy industry has to be good, therefore, when qualities such as vibrancy, creativity, flexibility and originality are considered. These are the strengths of a smaller but growing industry. Granted that a market downturn would have an impact, but let's face it, there will not be much capital likely to be headed back West this time around anyway.
Perhaps for the first time, in this cycle, Asia-Pacific hedge funds might have more to look forward to than their cousins in the West.
Paul Storey, editor