Optimism grows over Asia's recovering hedge fund sector

Favourable recent Asian hedge fund performance has spurred hopes of a better year ahead as the industry contends with a drop in assets on the back of disappointing 2011 returns.

The Eurekahedge Asia ex-Japan Hedge Fund Index gained 11.5% in 2012, falling slightly behind MSCI Asia ex-Japan’s 19.4% rise.

However, it represents a huge improvement from 2011, when Asian hedge funds delivered an average loss of -12%.

Event-driven was the best performing strategy in the region, with an average return of 28% in 2012, according to data provider Eurekahedge.

“There were, and continue to be, substantial gains to be made through inefficient prices within the Asean region for those who look hard enough,” says Alexander Mearns, Eurekahedge chief executive.

Asian long/short equity – the region’s predominant strategy – also fared well, with an average 11.7% full-year return, as did relative value (11.2%) and fixed income (10.8%).

With strong equity markets last year, “many of Asia’s long/short equity funds and multi-strategy funds profited by maintaining a long bias in their portfolios”, Mearns tells AsianInvestor.                                                                     

Despite the healthy numbers, it was a challenging year for the industry, with managers finding it difficult to navigate markets on a month-by-month basis. Asian strategies, on average, turned in losses between March and July before realising gains in the last few months of the year.

Among seasoned Asian managers, 2012 returns were typically in the mid-to-high single-digit range. They reportedly include Carl Huttenlocher’s Myriad Opportunities fund (7%) and Davide Erro’s Turiya (7.8%).

However, there were a few standouts. Among the best-performing Asia strategies in 2012 was Splendid Asia Macro – managed out of Singapore by ex-Credit Suisse prop desk trader Charlie Chan – which returned 63%. Another stand-out was Fortress Asia Macro Fund with 21%. 

The region had negative net flows of $500 million last year, according to Eurekahedge, attributable in part to the industry’s poor average performance in 2011.

North American hedge funds, by contrast, saw total inflows of $69 billion in 2012.

“We expect positive net inflows to Asian hedge funds in 2013, given the positive end to 2012,” says Mearns.

The attrition rate of hedge funds is not anticipated to rise, having remained fairly steady in the past two years. Last year, 102 Asian strategies launched, while 118 closed. In 2011, there were 140 fund launches and 148 closures.

Industry estimates put total Asian hedge fund AUM at about $140 billion, below a peak of $176 billion in 2007.  

Although assets have yet to recover to pre-crisis levels, the number of hedge fund administrators – whose income is directly tied to client AUM – continues to grow.  

Last year saw Viteos and Vistra Fund Services establish bases in the region, with SinoPac Financial Holdings planning a similar move.

The result has been a squeeze on profitability “with a very large number of players competing for a limited number of opportunities”, says Mearns, who predicts that industry consolidation will continue. “There are a staggering 82 fund administrators servicing 809 funds that are based in Asia,” he notes.

The business of prime broking has seen entrants in the form of RBS and HSBC.

Large hedge funds – those with more than $100 million in AUM – will remain the target of top-tier prime brokers, Mearns predicts. “We expect to see a trend of the large prime brokers rejecting small start-ups.”

He adds that while UBS, Deutsche Bank and Citi have increased their market share in the region, “Goldman Sachs and Morgan Stanley continue to be the dominant players”.