Favoured hedge fund strategy: long and short of it
The Asian hedge fund industry has come a long way, having seen many market cycles. Yet one factor remains the same: long/short equity is still the most popular strategy.
Despite the diversification of Asian strategies in recent years, long/short equity has maintained its dominance and continues to account for the biggest share of the region’s hedge fund assets. Data provider Eurekahedge puts the figure at about one-third of industry AUM.
Pre-crisis, the figure was about 60%, but a maturing of the industry has led to more launches of macro, multi-strategy, event-driven, fixed-income, managed futures and distressed-debt funds over the past few years.
The liquidity and scalability of long/short equity funds are among the reasons for their popularity, says Matt Kiraly, HSBC’s head of prime finance sales for Asia-Pacific. “It’s one of the easier strategies to scale up in size, especially if the focus is on larger-cap securities.”
Alexander Mearns, chief executive of Eurekahedge, notes that equities have long been the most favoured way for investors gain exposure to the growth of Asia and emerging markets, with short positions helping to offset bear markets and tail risks.
Post-crisis volatility in Asian markets has helped to spotlight the long/short equity managers who are able to navigate difficult market conditions and generate returns from both long and short trades.
“There has been a huge improvement over the last few years, in terms of quality of managers, compared to the long/short equity managers from five-to-seven years ago,” says Candy Cheung, a portfolio manager at fund-of-hedge-fund firm Sail Advisors.
However, she adds: “Asset-raising is still difficult” if a manager can’t generate non-correlated returns.
Having good – if not outstanding – performance is the key to attracting allocations, says Angharad Fitzwilliams, from Deutsche Bank’s capital introductions group in Asia.
“The performance expectations of investors who are going to allocate to an Asia long/short fund are often much higher than if they were going to invest in a US or European long/short fund,” she notes. “They want to see higher performance figures.
“Investors believe growth rates in emerging market countries, including Asia, are higher, and they therefore have greater performance expectations for them,” adds Fitzwilliams.
While manager quality has improved, returns vary greatly. “Performance last year was very diverse,” she says, depending on whether the portfolio was focused on small-to-mid-cap or large-cap stocks.
Funds with smaller AUMs tend to do better, as managers are able to move in and out of portfolio positions faster than their larger counterparts, says Cheung at Sail. “We’ve seen managers who have grown to a large size, after which their returns are less interesting.”
There is no set baseline size at which performance drops, although generally having an AUM of more than a few billion dollars leaves an Asia-focused manager with less manoeuvrability in making trades.
Good performance has helped managers in China and Japan to gain favourable recognition. As a result, the two markets are expected to yield a crop of new long/short funds in the coming years.
Japanese hedge funds have gained 16.6% in the first five months of 2013, according to Eurkekahedge, as strong market rallies have helped to lift the industry. “We can expect to see more launches in Japan,” says Cheung.
China, meanwhile, is expected to produce a pipeline of launches from large domestic asset managers that plan to set up Hong Kong offices to launch offshore long/short equity funds. “We think that’s where a lot of the growth is going to come from,” says Kiraly at HSBC.
*A full version of this article will appear in the July edition of AsianInvestor.