What Americans are looking for in Asian alternatives
New York based alternatives manager StoneWater Capital runs the fund of funds which, according to data providers, had the highest return in Asia during 2010. StoneWater Capital Asia (ex-Japan) returned 27.9% in 2010, after a 57% return in 2009. It's a firm whose assets largely derive from US-based investors.
By its own admission, the firm had a tough crisis. In 2008 it was running $230 million, but due to losses and redemptions its assets fell to $60 million. Remaining at the helm was fund CIO Frank Brochin, who brought in new senior staff to reflect market necessities, such as James Canales, partner and chief operating officer, who is also responsible for operational due diligence.
The firm now manages $150 million, and launched a second product with a global emerging markets, multi asset class and multi investment strategy in mid-2010.
The secret of their success in the last two years was to run a long-biased strategy, with an average net exposure of 80%.
“We look for managers with a Warren Buffett-style of investing, meaning concentrated positions, long-term investment horizon, backed by fundamental deep research. It is similar to private equity in the public markets,” says Brochin.
“Our investors want the Asian growth story, and yes, that will involve capturing some Asian beta, too. If they want a perfectly hedged product, then there’s no need for them to come to Asia to find that. There are plenty of those highly hedged or market neutral managers to be found in New York.”
So why not just go for an index product or an ETF?
StoneWater says that better investment profits are to be made outside the big blue-chip Asian exporters, so they want managers who can find those smaller and mid-sized companies focused on domestic Asian consumption, which are under-researched by brokers, more attractively valued and can deliver the best long-term upside. Currently, StoneWater has 16 Asian managers in its portfolio, and whittled those down from about 1,200 potentials.
“We turn over about 10% of our managerial portfolio each year," says Brochin. “Once we find a manager whose investment philosophy, judgement and skills we like, we tend to stick with him for the long term.”
Two-thirds of the fund is pan-Asian and the remainder is allocated to single country specialists. The fund has a 1.5% management fee and 5% performance fee, and given that they have negotiated fee discounts with some underlying managers, the blended cost of investing in their product (ie hedge fund fees plus the StoneWater fees) are less than 2.8% management fee and 19% performance fee.