Segantii insider trade probe to hit sentiment on hedge funds
Investor confidence in hedge funds could see a temporary dip in the aftermath of the insider dealing probe into Segantii Capital and its subsequent shutdown.
“This incident inevitably will have a negative impact on the sentiment towards hedge funds ,” an asset management investor based in Hong Kong, who declined to be named, told AsianInvestor.
“However, it is important to note that the underlying issue/risk is not new nor unique to hedge funds - equity capital markets (ECM) is particularly exposed to these non-public information risks. While the ECM strategy has undoubtedly contributed returns in the past, its impact has been less significant in the last couple of years due to a more limited opportunity set,” the investor added.
Hong Kong’s financial regulator in early May launched criminal proceedings in an insider dealing case against hedge fund Segantii Capital Management and its founder and director owner Simon Sadler.
The charges relate to dealing in shares of an unnamed company listed on the Hong Kong Stock Exchange in June 2017, according to an SFC statement.
Amid media reports of huge fund withdrawal requests following the SFC action, the fund house -- considered by some as one of Asia's most successful hedge funds -- decided to return investor money.
“We have decided…that at this time, it is in the best interests of our investors to return their capital in an orderly manner," a company spokesperson told sister publication FinanceAsia. The spokesperson also said that Segantii intends to ‘defend itself vigorously against the [SFC] charge.”
PERFORMANCE MATTERS
Globally, hedge funds -- which employ non-traditional strategies including long and short positions, leveraging, arbitrage, swaps, etc., to manage risks and enhance potential returns -- have a chequered past, dogged by trading scandals and investor complaints of high fee structures.
Yet, they continue to attract wealthy and large institutional investors for their ability to generate absolute returns that are less correlated to stock or bond markets.
“Over the last few decades, there have been a number of hedge fund cases globally that involved alleged or proven insider trading. In all of these cases, the impact to the overall hedge fund industry has been relatively limited, and often viewed as idiosyncratic in nature,” said Hugh Chung, chief investment advisory officer at Endowus, a digital wealth platform.
Endowus
“The factors that have a larger impact on the appetite for hedge funds is the collective performance of the asset class, and whether they are able to justify the fees that they charge.”
About 60% of wealthy investors in Hong Kong are planning to increase the allocations to private market strategies and hedge funds, according to an Endowus Private Wealth Insights Report released on May 29.
The survey covered 500 high net worth individuals across Hong Kong and Singapore.
The top concern they have about their current portfolios is the lack of greater diversification, the report added.
The hedge funds that have been gathering the most interest of late are the multi-strategy, multi-manager hedge funds, as they have been delivering higher risk-adjusted returns compared to the average single manager hedge funds over the past few years, according to Endowus.
Multi-manager firms have grown their assets under management in the past five years by 175% , outgrowing the rest of the hedge fund universe’s growth of 13%.
Multi-strategy hedge funds have also seen rapid growth, and now hold about 20% of the hedge fund industry's assets of roughly $872 billion, according to Endowus.
TRADING RELATIONSHIPS
The Segantii scandal brings into focus the relationship between banks and hedge funds. Citi and Bank of America, back in 2022, had suspended all equity trading with Segantii due to the hedge fund's bets via block sales.
Given persistent issues, It would make sense for regulators to clarify further on the rules in terms of how trades should be run, the asset management investor said.
“Who banks can contact and what information they can share [should be clarified] to avoid market manipulation based on that information, which should ultimately benefit hedge funds (and other investors) and help avoid similar issues going forward.”
“Investors should always do deep due diligence on hedge fund managers on the investment, risk management and operational fronts, e.g. review managers’ defense mechanisms against non-public information situations (verify there are established processes to handle sensitive information, monitor traders’ external communications etc.),” the investor added.
TO HEDGE OR NOT?
Investors need to be clear about why they are investing in a hedge fund as well - and what they are getting into.
“For example, a hedge fund that has low correlation to public stock markets should not be judged on its ability to outperform when markets are strong — it should be assessed for whether it is generating idiosyncratic returns and is taking appropriate risk (including leverage) and charging appropriate fees and terms to generate those returns,” said Endowus's Chung.
“Another important aspect of hedge fund allocation may be to see how complementary it is to your existing public market investments across stocks and bonds.
"When you already have a large allocation to public stocks and bonds, it may be more complementary for new capital to be allocated to hedge funds that could lower the volatility and correlation of the overall portfolio, including your existing one,” Chung added.
Andrew Tjaardstra contributed to this story.