Singapore’s Thermax family office sees China, Asia hedge fund opportunities
As global markets head into another year likely filled with ongoing risk and uncertainty, some are looking to alternative investments in search of returns.
Persistent geopolitical tensions, economic fluctuations, and unforeseen challenges are anticipated by many, contributing to an environment of continued unpredictability in the financial landscape, according to the family office for the owners of Thermax, a leading energy and environment solutions company listed in India.
“Looking at the macro environment, we can sense heightened risks and uncertainties as we enter 2024,” said Yogiraj A. Nadgauda, the Singapore-based ex-India Head of RDA Investments, in an exclusive interview with AsianInvestor. “We have identified compelling opportunities in the hedge fund space where asset valuations remain subdued.”
Nadgauda describes hedge fund investments as providing an optimal blend of absolute returns, capital preservation, and robust risk management for family offices.
“Interesting opportunities are there in China, which has fallen out of favour and offers appealing valuations. Asia is another region that has caught our attention where countries such as Philippines-listed stocks are valued at single-digits PE multiples. These stand in contrast to the highly valued markets in the developed countries,” he added.
STRATEGIES IN PLACE
Allocations of 20% to 25% to hedge funds within a portfolio are commonly observed for long-term investors. Asset allocators at times opt for higher allocations non-correlated asset classes as an alternative to traditional markets in search of growth.
“Hedge funds in our family offices portfolio make sense as they are less correlated to the overall markets and allow us to express our views through various hedge fund strategies,” Nadgauda said.
His firm has engaged with strategies including alternative credit, equity long-short, relative value, and global macro.
“Performance is context-dependent; for instance, equity long-short thrives in bullish markets, while macro managers excel in fluctuating interest rate environments. Adapting allocations to match market conditions is crucial, as observed during the shift in regime from 2021 to 2022.”
RIGHT ALIGNMENT
Alignment between a hedge fund and family office goals is also important when choosing the manager and strategies, Nadgauda said. Two parameters his family office looks at include “strong risk management to ensure there is not, or less, capital loss in the event things go wrong. Secondly, the conviction of the managers. For example, some managers don’t charge management fees and their entire profit comes from the carry.”
Hedge funds, while offering the potential of high returns, also pose inherent risks due to their complex strategies.
Nadgauda listed “performance portability, keyman risk, gearing to enhance performance, and liquidity terms” as key red flags.
“Some hedge fund strategies or investments may be illiquid. Assessing the implications of illiquidity and the fund's ability to manage such positions is crucial, especially during redemption periods,” Nadgauda said.
He added, “We pay attention to how the fund’s strategies perform in various market conditions, especially during downturns or periods of heightened volatility. It is also imperative to remain vigilant, consistently monitoring managers for any deviations from their stated strategies or if their performance diverges from the expected trajectory.”
DUE DILIGENCE
Thorough due diligence on fund managers investing in hedge funds is paramount and there are numerous ways to perform this. For RDA Investments, besides looking at the standard parameters, they also prefer to work with fund managers with “minimum five years audited track record in the same firm.”
Nadgauda also highlights some qualitative factors the office keeps in mind: “Does the fund manager have skin in the game (a personal investment in the fund)? Managerial background and key performance indicators of the managers. Any history of the fund manager's involvement in illicit activities like insider trading or price rigging? Additionally, assessing the fund size is also a crucial factor.”
The investor advised staying “vigilant, consistently monitoring managers for any deviations from their stated strategies or if their performance diverges from the expected trajectory. This proactive stance allows us to swiftly address any concerns or discrepancies that may arise,” he added.