growth market

Asian hedge funds continue to perform well in the face of stock market uncertainty

by Alex Frew McMillan Translation by KT Wong

After a very strong 2007 for Asian stocks, it has been tough going so far in 2008. Hedge funds could distinguish themselves in the latter part of this year, though, if they deliver on claims they can make money in both bear and bull markets. statistics from singapore-based hedge fund tracker eurekahedge show that Asia-focused hedge funds are faring much better than stocks overall. The eurekahedge Asian Hedge Fund index is up  
11.3% year to date, while the Japan Hedge Fund index is up 7.1%. by contrast, Chinese stocks were down 54% through the end of June.

The Tiburon Tao Fund is a useful case study. The Greater China long/short fund gained 19.65% from January through May for its us dollar class. The fund, which is listed in Dublin, is up 36.9% since its launch on 1 May, 2007. “The fund has been doing exceptionally well,” says Tiburon Partners’ CeO Mark Martyrossian. “The strong performance has been particularly pleasing at a time when ‘de-risking’ for many investors has meant running away from China.”

Jeff Coggshall, the company’s head of Greater China products, oversees the fund. He has steered through a tricky period for Chinese markets by maintaining a healthy exposure to Taiwan, where stocks got a boost from the Kuomintang’s victory in the presidential elections, and by ignoring the bluster over the ‘through train’ allowing Chinese investment in Hong Kong-listed stocks. it’s performances like that have been attracting new investors to Asia-based hedge funds, with us$100.3bn in assets invested in Asia-focused hedge funds at end of the first quarter, according to a report from Hedge Fund Research (HFR). HFR president Kenneth Heinz notes that the Asian hedge fund industry accounts for almost 14% of the absolute number of hedge funds, but only around 5.3% of total capital. “Asian hedge fund investors are likely to benefit from the introduction of a broader range of strategies that will give them an enhanced ability to invest long and short as a vehicle for managing market volatility,” says Heinz. “Given the level of wealth creation in Asia, the long-term prospects for growth in hedge funds focusing on Asia remain strong.”

There are 1,076 Asia-focused hedge funds, according to HFR. Roughly half are run from Asia, with Hong Kong, singapore, Japan and Australia the main locations for managers. The other half of the Asia-focused funds are run from britain or the us. but the number of Asia-based managers is rising, with some attracting the support of big institutional investors. For instance, Citic securities international has teamed up with Hong Kong-based VisionGain Capital, a new hedge fund management company founded by Tina so and Ye Xiang. “We’re very fortunate to have their confidence and their trust,” says so. “They’ll provide us with no less than us$20m in two stages, which is basically seed money in our first fund, and in addition they also take a 19% stake in our company, so they’re shareholders as well.” so was previously a managing director and chief investment officer at bank of China international investment Managers in shanghai, where Ye was an executive director and consultant. both also previously worked for the Hong Kong securities and Futures Commission.

The tie-up with Citic securities, the largest investment bank in mainland China, links VisionGain Capital with a network of analysts and investment bankers covering mainland-listed companies and working on most of the big investment banking deals in China. “For us to be able to work with Citic helps us not only in terms of corporate assets but in terms of research,” says so.

The VisionGain Capital China Absolute Return Fund launched in March with around us$81m in assets. The fund is looking to benefit from the long-term growth trend in China and will mainly invest in equities based on interpreting beijing’s policymaking. but it can also invest in bonds, convertibles and derivatives such as index futures. it’s not just homegrown companies that are setting up shop in Asia. Many of the larger alternative-investment players have opened offices here. Citadel investment Group, Oaktree Capital Management, De shaw and edmond de Rothschild Asset Management are some of the recent arrivals in Hong Kong. The blackstone Group even hired Hong Kong’s former financial secretary, Antony Leung, to head a new private equity operation in Hong Kong.

Pension funds in Japan and Australia are some of the heaviest users of hedge funds. According to a 2007 survey by Greenwich Associates, 69% of Japanese pension funds – more than two-thirds – now use hedge funds, rising to around 74% for corporate pension funds. Their high use of hedge funds stems in part from the poor performance of both Japanese stocks and bonds, meaning pension funds have little choice but to explore alternative investments if they want to meet their long-term obligations to their members. “What you’re seeing is the funds getting up to a reasonable level of asset allocation through hedge funds, at 9.0%,” says Greenwich Associates consultant Taeko sumiyoshi said “but it could get up to 10% or more.”

The dire performance of the stock markets in China and india so far this year presents an opportunity for Japan-focused hedge funds, according to one Tokyo-based fund of hedge funds manager. “With the rest of the world in rather dire straights it seems this might be a bit of a comeback year for Japan,” says ed Rogers, the founder of Rogers investment Advisors.

Rogers, the former head of prime services sales for Deutsche bank in Japan, set up Tokyo-based Rogers investment Advisors in 2006. it’s the sub-

adviser to the Wolver Hill Japan Multi-strategy Fund. Rogers’ fund produced a gain of around 12% from January through May, with volatility of around 3%, a performance that he says makes him “a very happy manager indeed”.

Rogers, who moved to Asia in 1987, says Japan’s market will be less affected by the credit crunch than europe or the us. “Japan was almost completely unlevered on corporate and household level,” he notes. “There are no major Japanese banks that are going to go down in the subprime crisis, and the Fidelity- and Putnam-type money that has avoided Japan is going to come back.”

Though the past two years have seen a lot of hedge fund managers pull out of Japan, Rogers is optimistic. He points out that exactly 25 Japan-only managers shut down last year and another 25 opened up. “While there was a significant number of funds going out of business, we also had an equal number of hopefuls open up shop,” he says.

Hedge fund an investment fund that is often loosely regulated but that hedges its investments, typically by offsetting one position with a similar but opposite play
Long/sHort the most common investment strategy for hedge funds in Asia, involving a fund buying stocks both ‘long’, by buying and holding, and ‘short’, selling borrowed shares it hopes to buy back at a cheaper price
Private equity an investment fund that takes positions in private companies, as opposed to the publicly traded investments favoured by hedge funds
Leverage basically, borrowing – also known as ‘gearing’ – that hedge funds use to amplify the size of their positions
Arbitrage a common hedge fund strategy involving taking advantage of differences in price between two similar investments