Onion(ed) twice over

Tue Mar 15, 2011

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As global problems threaten to flush capital out of emerging markets, can managers survive the storm?


By Aradhna Dayal

nullOn Christmas Eve, a strange phenomenon was observed in India - Santa Claus look-alikes were seen handing out onions as Christmas presents; with prices of this staple vegetable skyrocketing to $2 per kilo, onions seemed to be at the top of everyone's wish list. Known historically to bring down governments, the onion crisis sent the state machinery into frenzied remedial action - to save the day somehow.

Egypt unfortunately was not as lucky, and two months later, rising food prices fuelled an unrest that has since spread across the Middle East and North Africa like wildfire, and is threatening to not just bring about a new geopolitical world order, but also force dramatic shifts in the investment landscape over the next 12 months.

Oil prices are already soaring following the Middle East crisis, and this will have a domino effect, likely impacting emerging markets significantly. Rising energy prices will spark a fresh round of inflationary pressure in most emerging market economies, and governments will have little choice but to resort to accelerated monetary tightening policies. China and India - the two pillars of the Asian growth story - are classic examples of this and will undoubtedly be hit by a resultant economic slowdown that may hit all emerging markets.

For Asian hedge fund managers, who are just beginning to see serious capital flow back into the region (following a prolonged period of inactivity), this is not great news. As emerging market equities get hit and fund performances get impacted, there is every chance that international allocators will pick up their cheque books and head back to developed markets.

For an industry that got hit hard by the global financial crisis (assets almost halved from the 2007 highs of $190 billion), and has since then worked hard at rebuilding itself, a second exodus may prove fatal. Especially because this time round there is very little locked up capital.

In short, there is every chance of Asian managers getting onioned twice over.

Indeed, it is estimated that almost half of the capital in Asian hedge funds (a majority of which is new capital that has flown back post crisis) is not locked up. The reality of today is that if you are a star trader or a well known second-generation manager, you can probably negotiate for a one- or even two-year lock-up. But small to mid-size managers are hard pressed to find investors that will accept anything but monthly liquidity.

This makes me wonder as to what would happen if the EM-DM trade accelerates in the hedge fund space, and how vulnerable Asian managers are to a situation like that, should it arise again? The answer, when it came to me, bowled me over with its simplicity. Just as the ubiquitous onion is known not just for its pungency but also for its medicinal value, I feel that the capital exodus back in 2008-2009 has made the Asian managers a lot more resilient, alpha driven and astute about business building, and this could well save the day.

To start with, Asian managers have rebuilt their investor bases more carefully this time round, matching investor needs and liquidity profiles better with their strategies.

Early numbers also show that Asian funds, especially in the more vulnerable small to mid-cap and single-country areas, have maintained performances despite this year's volatile markets.

Finally, new growth areas such as Renminbi-focused products will also go a long way in keeping investors glued to Asia.

In line with this, we bring you a report on the emerging CNH (Rmb traded in Hong Kong) market and how hedge funds such as Dymon Asia are moving into it, plus a profile on Central Asset Investments - a pioneer in the Asian multi-strategy space. Celebrating the re-birth of the billion dollar launches, we also bring you an exclusive on Benjamin Fuchs' spinout from Nomura.

The March issue of AsiaHedge also contains the Asset Survey for 2H2010, which reveals that with a 15% annual growth and $152 billion in assets under its belt at end-2010, the Asian hedge fund industry is on a solid track to recovery.

We look forward to seeing you at the AsiaHedge Forum in Hong Kong this week.

ISSN: 2151-1845 / CDC10004H