AsiaHedge Forum 2008
Venue: JW Marriott Hotel
Location: Hong Kong
Dates: Wednesday, 15 October 2008
Thursday, 16 October 2008
It is now just a few weeks until the 2008 AsiaHedge Forum, to be held in Hong Kong at the JW Marriott Hotel on 15-16 October. This year, the event is set against the backdrop of one of the most challenging environments that the global financial system has seen since the 1930s.
Search for answers as global markets face up to meltdown
As volatile conditions shook the global financial industry in mid-October, delegates to the AsiaHedge Forum were able to debate key questions in 'real time' as events played out
'Strategies to beat the credit crunch', the theme of this year's AsiaHedge Forum – held in Hong Kong on 15 and 16 October – could not have been more timely. The event coincided with one of the most volatile periods ever for global markets, which certainly served to focus the attention of panelists and audiences alike.
Over the course of the Forum several themes emerged – what managers can do to constrain the downside; the crucial importance of managers matching their assets with their liabilities; and whether or not China's growth story can mitigate the impact of a global recession. Other recurring themes were the extent to which hedge funds can self-regulate as pressure grows for external regulation of the industry by non-practitioners, and regulators' uneasy relationship with shorting.
The first panel at the AsiaHedge Forum debated the impact of the credit crisis on the region and the macro-economic outlook
The first session of the day got straight to the point: the effects of the credit crisis on Asia, with panelists from Coupland Cardiff Asset Management, Myo Capital, GaveKal Research and Bowen Capital Management, moderated by AsiaHedge editor Paul Storey.
In response to the opening question – whether the current market situation was a financial Armageddon – Richard Cardiff said it indeed looked like one, with a financial and banking crisis unfolding in the US and Europe, and government support coming for banks in several ways, including taking part ownership in these markets. In Asia, however, the major concern is what impact a slowdown in the West will have on export demand, he added.
Myo Capital's Justin Ferrier agreed. He noted that the risk to emerging markets and to the Asian financial markets has still not completely disappeared and said we could see many more events unfolding in Asia in the coming months. Louis-Vincent Gave of GaveKal said that these are unprecedented times as it is the first time that all asset classes are taking a hit, remarking that there is "nowhere to hide".
This is a time of paradigm shift and also the macro climate is changing, Gave said, noting that the current environment is deflationary rather than inflationary, as well as being a stronger yen and stronger dollar environment. Therefore, managers need to look at opportunities that will emerge at the end of it all, look for asset classes that would benefit from deflation and look for asset classes that would benefit from a strong dollar and a strong yen. Bowen Capital's Jeremy Higgs noted that there are still a lot of opportunities available in the environment despite the market slowdown.
Will investors stay or go in Asia? The panelists shared their views on which strategies 7they would be focusing on within the region
Next was a panel session that asked whether or not investors would flee Asia. It brought together panelists from Sal. Oppenheim, Asian Alpha, Mesirow Advanced Strategies and Triple A Partners, moderated by HSBC's Jonathan Field. The panelists shared their views on where they would be focusing their attention within the region.
Mesirow's Brian Portnoy said he had already shied away from long-biased equity funds, and although equity was still going to be a priority, he was spending a lot of time in the credit area. Asian Alpha's David Penhale noted that equity long/short funds had nowhere to hide in current market conditions, but added that macro fund managers and short-term traders had done well, and that there were opportunities for survivors across all strategies.
Sal. Openheim's Ming Lee said she was looking at the distressed space, but with an emphasis on managers who can manage risk well and maintain the right liquidity terms. "There hasn't been enough demonstration of alpha in Japan so far, and we have tended to stay away from single country managers, as they can't move their portfolio day-to-day," she said. "We want managers to be able to be relatively flexible, and single country funds lack the depth of liquidity that pan-Asian managers have."
Both Portnoy and Lee said they were looking for managers with a substantial history who could prove their mettle in an emerging markets down cycle. "Foremost, we are looking to invest with managers running mature and sophisticated businesses," said Portnoy. "We talk to them about business stability and operational robustness."
The panelists had plenty to say about the likely landscape for hedge fund managers in the next year or two. Triple A Partners' Paul Smith expects a significant contraction in the number of Asian hedge fund managers. "In single strategy the big will get bigger and the small will find it harder to grow their businesses. Some will cap themselves out at a reasonable size, which will enable them to justify the two-and-20 fee structure, while other managers will become quasi-institutional," he said.
The first of two keynote speakers at the forum, Yang Liu, manager of the Atlantis China fund, gave a robust defence of her recent controversial decision to close the fund to new investors and to redemptions, and also outlined her vision for the China market in the years ahead (see page 16).
The final session of the morning tackled the subject of whether or not the credit crisis would be a catalyst for more 'real' hedge funds in Asia. Moderator Neil Wilson, editorial director at HedgeFund Intelligence, called on the views of panelists from Trafalgar Copley, Citadel Asia and Titan Capital to examine the impact of unprecedented regulatory and government involvement in the markets, and to give their expert views on the factors that will determine which managers will survive the pressures the industry is now facing.
Australia's decision to ban shorting was one of the interventions up for discussion, and New Zealand-based Trafalgar Copley's David Copley was surprised by the breadth of the ban. "But capital markets are very creative and will find other ways to short so the short-selling rules didn't help," he said.
Copley also bemoaned hedge funds' inability to constrain the downside. "We used to think that starting the day strictly market neutral was a good way to constrain the downside, but in recent months all attempts at market neutrality have been overpowered by deleveraging themes," he said. "Also, some of these issues have been caused not just by managers but also by investors, and managers will have to do a lot more due diligence on their own investors," he added.
"There are sure to be a lot of changes in the industry," agreed Citadel's Tim Throsby. "As a whole it will have less beta, less leverage and funds will be more liquid, by choice and by lack of choice."
Eddie Tam, Daren Riley, Michael Nock and Wing Cheng Chan discussed regional strategies and how to diversify risk
The afternoon sessions began with a panel on regional strategies, in which moderator Paul Storey invited panelists to ponder the question of whether or not they have a role to play in diversifying risk. Heritage Capital Management's Wing Cheng Chan commented that regional stocks are cheap. "But where is the bottom? We've never seen the effects of a global recession in the markets we are looking at," he said.
Eddie Tam of Central Asset Investments agreed: "The Asian credit space has been decimated, people are afraid of extreme events, but they are becoming commonplace," he said. "Companies are priced as if they will fail, but I don't think they will. These are extremes and there will be a natural reversion to the mean." The crisis has affected the way regional funds look at companies, argued Doric Capital's Michael Nock. "Who would imagine that the Hong Kong government comes out and guarantees all bank deposits? This is a crisis of unimaginable proportions. Anyone who thinks that it's not going to affect how people behave in the real economy is kidding themselves, and we are having a re-look at companies we know well in the context of the new scenario," he said.
Being pan-Asian helps Riley Patterson in the current climate, said Daren Riley, and he noted that different countries are responding in different ways. "A lot of economies are still export-driven, but China will be better insulated. China has already come off a lot and we think China is now starting to look interesting," he said.
'Toughing out the volatility' was the title of the China panel, and to discuss this timely topic AsiaHedge's deputy editor Aradhna Dayal brought together panelists from Wessex Asset Management, Marco Polo Pure Asset Management, Pinpoint Investment Advisors and Greenwoods Asset Management. Overall, the view on China remains positive, according to the panelists, but the market demands greater than ever vigilance.
"If anything makes us feel uncomfortable, we're reacting much faster. Investors' risk appetite is much lower now," said Pinpoint's Alex Zongyi Li. Whilst it remains difficult to call the bottom, comfort can be derived from historically low price/earnings ratios, said Joseph Zeng of Greenwoods. "We're very positive now on China," he said.
The ability of the Chinese government to manage the impact of the global crisis was also up for discussion. "I think the Chinese government will pull out all the stops to maintain GDP growth to at least 8%, and they have been very focused and efficient so far," said Wessex's Anna Donald. Forthcoming government policies heartened Alan Landau of Marco Polo. "It's very important to factor in policies in the pipeline, such as healthcare reform and other policies to create a harmonious society," he said.
Kedar Wagle, Tajinder Singh and Ponty Singh debated the outlook for India funds
India, has been something of a fallen star for investors, but Neil Wilson asked three prominent India managers from Venus Capital Management, Akshayam Capital and Tricolour Capital whether or not the pessimism about India has been overdone. Akshayam Capital's Kedar Wagle said his outlook remains negative. "Most people agree that valuations are still expensive," he said. "What most people don't realise, is that the corporate and economic cycle is clearly turning, there are signs of a slowdown but earnings estimates don't reflect that," said Wagle. The likely trajectory of the rupee was another hot topic. "The rupee has devalued a little bit too much recently," said Tajinder Singh of Venus Capital Management. "I've seen a lot of analysts saying that the rupee will depreciate further but we've seen that before and in reality it went the other way." The first day of the Forum came to a close with an analysis of fund closures by Paul Storey, who started by pointing out how much the industry has grown in the past eight years. In 2000, there were an estimated 110 funds with just $12 billion in assets under management. By 2008, that figure climbed to 850 funds with $175 billion in AUM. "The total AUM topped out at $191 billion in 2007, so it's down 10% in the first half of this year. How the second half of 2008 will pan out is anyone's guess, but there will be a chunky fall," AsiaHedge predicted. Japan has been a disaster since 2006, he said, with Japan long/short equity the strategy hardest hit by closures, taking AUM from $46 billion in 2006 to $27 billion by the end of June 2008. Japan could well be an indicator of what to expect in the rest of the region – with the closure of 40 per cent of funds. As of the end of September there had been some 65 fund closures so far this year, but the attrition rate in Asia had historically been the lowest in the world, Storey noted, at 7.5% vs. 10%-plus for the US. Multi-strategy funds, on the other hand, have done well and this is now one of the largest strategies in the region, he said. Day Two of the AsiaHedge Forum comprised four sessions and a keynote presentation. To start the day, Theo Splinter of Citco Fund Services asked whether investors in the region are the Achilles heel of Asian hedge funds, and began by asking panelists whether the region had any of its own investors. James Chen of Vision Investment Management said that their ranks were growing. "We are beginning to see a slowly increasing percentage of private and institutional investors," he said. Speaking from a Singapore perspective, AIMA's Peter Douglas said that it has taken time for Asian investors to take the bull by the horns. "Five years ago people understood the academic reasons why they should invest in hedge funds, but it's taken them three to five years to do it," he said. Redemptions are coming from high net-worth individuals rather than institutional investors, said Shen Tan of DB Advisors. "Institutional clients have to be invested and may make manager changes rather than redeem to cash," he said.Paul Marshall, co-founder and chairman of Marshall Wace LLP, was introduced by Barclays Capital's Ashish Patel to deliver the Forum's second keynote speech, a thought-provoking analysis of where the hedge fund industry will be once the dust of the current crisis has settled. He described 2008 as "a watershed year when the economic and political power flows back into Asia. This will be reflected in our industry in the next 10 to 12 years," he said.
Keynote speaker Paul Marshall
On the issue of regulation, Marshall was unequivocal – the industry cannot expect to be left alone to self-regulate any longer, and hedge fund managers ignore the imperative to engage with regulators at their peril. "The major danger we have is misplaced regulation with unintended consequences," he said. "Politicians don't understand us, they don't know the industry, and we don't do ourselves any favours when 95% of hedge fund managers have a 'Do Not Disturb' sign on their door and don't want to engage with regulators," he said.
The financial crisis will cause up to half of the world's hedge funds to disappear, Marshall predicted. "There will be far fewer funds competing for alpha, and people will pay different prices for alpha and beta. Splitting the two types of funds will be a big theme in the hedge funds industry," he said. "Hedge funds and long-only institutions will meet in the territory of 130/30 funds, and the dividing line between hedge funds and long-only will become more hazy."
Arbitrage, volatility and multi-strategy came under the spotlight at the next panel session, bringing together panelists from Centaurus Capital, CQS, Lynx Arbitrage and AM Investment Partners, moderated by Newedge Group's Kirby Daley. They talked about how best to exploit the opportunity set in such a challenging market. Panelists agreed that investor engagement was key. "You can't just tell investors what you are going to do," said AM Investment Partners' Adam Stern. "You need to be prepared to have a dialogue with investors." "Even if you start as a multi-strategy fund people will ask you to do one more thing," agreed CQS's David Kilgore.
While Asia continues to be dominated by equities, fixed income could be a key factor in the region's future economic greatness. In the penultimate session of the day, AsiaHedge's Paul Storey asked three fixed income experts, "What now for the Asian fixed income market?"
Dag Detter, senior advisor to the private equity industry looked at the prospects for a bond market in China, which could be a very useful tool for a government with a large portfolio of state-owned enterprises. "A lot of institutional investors have concluded that a bond market will be needed in Asia, and it's a fantastic way to create better efficiency for state owned enterprises. It's desirable but extremely difficult for China," he said.
Eventually, the sheer scale of infrastructure projects will force the creation of a Chinese bond market, said the Viscount Bridport of bridport & Cie. "Sooner or later the Chinese will have to introduce it due to the need for $20-30 trillion for infrastructure projects, according to Asian Development Bank estimates," he said. Stratton Street Capital's Andrew Main called for more bond funds in Asia. "The spreads are there now and people should be out taking advantage of them," he said.
The last panel of the Forum covered the thorny issue of compliance and regulation
The event wrapped up with a panel discussion on the thorny issues of regulation and compliance. The topic of regulatory reaction to the current crisis was the first item on the agenda, with a panel from ComplianceAsia, Artradis, SHK Fund Management and Simmons & Simmons, moderated by Neil Wilson. "The regulators acted quickly to change the short-selling rules, and the problem for managers was the speed of this knee-jerk reaction from regulators in the US and the UK," said ComplianceAsia's Philippa Allen. "For managers to keep track of what was going on was very difficult. How could they when Australian regulators changed their mind six times in six days?"
Hong Kong's Securities and Futures Commission issued a warning to investors on abusive short-selling, which, said Rolfe Hayden of Simmons & Simmons, begs the question: "What is abusive short-selling?" SHK's Christophe Lee noted that the short-selling bans had back-fired. "If the object of banning short-selling was to stabilize the markets, it clearly hasn't worked. Markets keep falling, there's less liquidity and the shorting ban was counter-productive."
The regulatory variations from one jurisdiction to another make it difficult for funds investing across national boundaries, Hayden continued, adding that hedge funds should brace themselves for more regulatory scrutiny. "It's only a matter of time before the SFC pays attention to how funds managed from Hong Kong operate and no doubt there is going to be political pressure to focus on hedge funds," he said.
"People are trying to find a scapegoat," concurred Artradis' Julian Ings-Chambers. "It's extremely easy to target the hedge funds industry, which has been noticeably absent from the debate, but there has to be some response from the industry." Echoing a recurring theme throughout the Forum, what all panelists agreed on was that more regulation and stricter compliance requirements are looming over the horizon – whether the industry wants them or not.
Keynote speech Yang Liu: Why China now stands out in these interesting times
In her keynote speech to the AsiaHedge Forum, the 2007 Fund of the Year Award winner Yang Liu justified redemption suspensions and outlined why China is still the future of investment
"We are living in a turbulent and interesting world. Since the market has put so much focus on the way I manage the fund for my investors, I feel obligated to explain why my fund has suspended redemptions and subscriptions. Simply put: it is to protect my investors.
"In this moment, the market has lost its sense of mathematics, which is the basic foundation of human civilization. We have lost our way to value companies and fundamentals are not respected. The market has been dragged down by massive sell-offs and panic, regardless of fundamentals.
"Our investors entrust us to make money, and they shouldn't be forced to be involved in panic selling when the method used to value the market is so far away from basic logic.
"My answer is that mathematics is the god, therefore I look at the companies in my portfolio, half of which are trading in a net cash position, and I ask, how can I be forced to sell companies when valuations and basic sense are not respected?
"Most of my investors support me and say that as they don't want their assets to be dumped, that I have done the right thing.
"As for the outcome of these turbulent times, we need to rethink the hedge fund model. A high gearing ratio, for example, doesn't work in the current environment, neither does a business based on speculation. In future we have to build up our knowledge and fundamentals from the beginning.
"In the future, the cycle will be led by China. Not many countries are offering what China is offering this decade. The market is now trading at crisis valuations, but China's macro stance is solid. Two major contributors to China's GDP are fixed asset investment and domestic consumption. Consumer growth is growing with or without export growth. Moreover, the Chinese government will use whatever it has to support its growth.
"Retail sales have grown more slowly this year after 15 years of 15% annual growth, but the majority of the market has taken too much negative news into the China story.
"The Chinese government has the cash, thinking and resources to speed up retail sales and they could be maintained at 15% to 16% year-on-year. The increasing contribution from consumption to GDP growth is the only long-term strategy that the Chinese government should have to play and they can do a good job from a low base. Very few countries in the world have the trade surplus and strong currency that will offer China the best buffer against external shocks.
"Double-digit GDP growth will come to an end, but 8% is a very solid floor. Why? Because in the past 15 years, especially the most recent five years, there has been very little contribution from the private entrepreneur sector. China GDP growth will be supported by non-government economic activity, so economic growth is very much buffered.
"The American dream 30 years ago of a house, a car and a maybe a vacation home is now happening in China and every year millions more become millionaires. China has over 200 cities with a population of at least three million people each, whereas Europe only has 20 such cities. Size matters. The Chinese middle class will buy everything that consumers in the west have been urged to consume.
"That China's equity market is trading cheaper than Japan makes no sense. That China's weighting in Asia ex-Japan is the same as Hong Kong, Singapore and Korea doesn't make sense. China is the largest contributor to global growth and does not deserve a crisis valuation.
"Traditionally, China has been a discounted market. I don't deny that corporate governance and transparency are still problems, but there is nothing Wall Street can teach us about that now.
"China will offer dramatic returns for those who have belief that China is on its way to becoming the largest independent asset class. Asia ex-Japan is coming to an end, and China will take up the space left in the region."
To view the programme click here
To view a list of the speakers click here