Hedge fund managers look to stability in 2013

Hedge funds this year were spared the dramatic market movements of 2011, but nevertheless faced challenges. Managers from a cross-section of strategies relate their experiences and provide their outlook for 2013.

Kyu Ho, Wuzu Asia Partners, pan-Asia long/short equity
The best market opportunities for our long positions this year were in some Southeast Asian countries, where domestic consumption is the main driver of their economies. For our shorts, we found interesting opportunities in structurally weak companies in countries such as Japan, Korea and Taiwan.

The challenge this year was avoiding value traps: assets that look very cheap but, in fact, might not be recovering anytime soon, so the stocks stay cheap. However, we did identify companies that are very cheap because of cyclical reasons and were a bit more comfortable with, as we believed that the cycle would pick up.

Next year will be interesting. The market consensus is that the Chinese economy has stabilised, with some early signs of recovery, and the market has re-rated to reflect this. We do not anticipate strong earnings growth based on our on-the-ground research. However, the market does not look expensive if you believe in the earnings. There is definitely room to re-rate, especially for H-shares, though the extent would greatly depend on the market's confidence in earnings as well as the growth trajectory.    

Govert Heijboer, True Partner, global volatility arbitrage
We were long volatility exposure in Asia, and short in other parts of the world. That's worked quite well for us.

There was, it seemed, a persistent fear in the market that something would happen. The US was facing a fiscal cliff and debt ceiling, and the Europe Union had problems with Greece.

On average, people in Asia are a bit less fearful on what's going in the other parts of the world, perhaps a bit more optimistic.  

Next year, it's possible that there will still be quite a bit of fear in the markets which will subside slightly if nothing materialises.

The probability of dramatic events is somewhat low but there could be events that shock the markets. Europe seems somewhat under control, but if something emerges from the shadows, the situation could change very quickly.

In Asia, market sentiment might be even more positive next year, if China takes extra measures to stimulate the economy. 

Eddie Tam, Central Asset Investments, multi-strategy
Hot money started flowing back into Asia, particularly to Hong Kong and China, from the end of the Q3 and it's been driving up the markets. This is more or less how we saw it last year, but in-between there were a lot of headline macro worries. Navigating through it was more difficult than predicting it. 

We were very bullish on Chinese property bonds and correctly predicted that they would not fail, at least not the large listed ones. Real estate transactions have rebounded very healthily this year and prices are stable.  

What surprised us was the sustainability of some luxury retail plays. Burberry and Mulberry started to crack; these are European-listed but are sometimes regarded as surrogate Asian plays. Other luxury brands have been very resilient. For example, Prada, which is listed in Hong Kong, has been going from strength to strength.  

As the Americans are terribly conservative, they view the fiscal cliff as being imminent, when in actuality it's not. I predict the second term of [president Barack] Obama will start to address that issue. Once he does that, it's possible the economy will slow even further because it will involve less government spending, but the market may reward it with a higher price-to-earnings ratio. It's short-term pain, but could be better for the long term.

Wong Yu Liang, Lumiere Capital, Asian deep value
This year has been a good year to buy stocks at cheap prices, with 2012 marking the continuation of a bear market that began in 2011. We managed to find several bargains, especially in the Hong Kong market, with many stocks having fallen more than 60% from their peak prices in 2011.

Markets were seemingly trading with a very short-term outlook, with few participants looking deep into the fundamentals of each company. Stocks of companies have moved up and down in tandem with sector or country sentiment, without paying heed to the individual merits of each business.

As bottom-up stock-pickers, this provided us with plentiful opportunities to acquire cheaply priced stocks of companies with strong, growing businesses that happened to be operating in countries and sectors that were out of favour.

We predict 2013 will be a good year for stocks, because valuations are low and the earnings of many businesses – especially in Greater China – were hard-hit in the second half of 2011 and first half of 2012. Expectations have also become more realistic compared to the heady days in early 2011, and we are likely to see an earnings recovery starting from end-2012 onwards.

Robert Appleby, ADM Capital, distressed debt
This year we have experienced a credit melt-up. Right across the credit curve, you have had record demand met by record issuance.  

The hunt for yield globally is on. Asian credit holds a premium to credit elsewhere and investors are harvesting that premium.

We’ve always been extremely careful about where we play on the credit curve. For a long time we felt that the choice has to be made carefully and we are reducing our exposure to public credit as we speak.

Looking ahead, we have long held the view that investors will be rewarded for the extra work needed in private credit markets. Companies that need cash, and don't have the luxury of tapping into the public debt markets, will have to get it elsewhere. This is where private credit can play a role.

A full version of this article is featured in the December edition of AsianInvestor magazine.