Viren Vaghela, Asia Risk Source: Hedge Funds Review 30 Mar 2011
Proprietary traders moving from banks to Hong Kong hedge funds have helped the industry turn a corner. A Securities and Futures Commission report indicates the industry is bouncing back in Asia.
Proprietary traders moving from banks to hedge funds in Hong Kong as well as international hedge funds setting up offices in Asia have helped the industry rebound following a sharp contraction in the aftermath of the bankruptcy of Lehman Brothers in 2008, according to market participants.
The Hong Kong Securities and Futures Commission's (SFC) recently released annual Hong Kong hedge fund survey shows assets under management (AUM) are increasing. By September 2010 hedge funds assets in Hong Kong reached $63.2 billion, up from $55.3 billion at the end of March 2009. Total AUM is still below the March 2008 peak of $90.1 billion.
"We think it is genuine growth. 2008-09 was a difficult period for the Asian hedge fund industry," said Giselle Lee, executive director at Man Investments in Hong Kong.
"The industry is now in a growth phase evidenced by two things. Firstly, lots of proprietary traders from investment banks. Some banks have eliminated these desks or they have shrunk dramatically, so lots of prop traders have set up their own shops. And lots of global funds which run Asian books have decided to open an Asian office," noted Lee.
Historically many hedge funds have been happy to trade Asia from London or New York. "Increasingly people see there is potential to leverage off local information only available from within the region," Lee added. "Seven of the top 10 equity markets by trading volume are now in Asia, which is quite surprising for a lot of people, but shows the trend."
Andrew Gordon, head of alternative investment services in Asia at BNY Mellon in Hong Kong, says he is seeing a similar picture. "In many cases you are seeing a second generation of managers leaving hedge funds and large banks to set up themselves," he says. Sultan Arif, a Singapore-based hedge fund researcher at Eurekahedge, expects further growth with more launches and asset flows. "We expect the size of the industry to reach an historical high by the end of the year," he said.
Despite some positive sentiment, however, not everyone is convinced. "Even if the numbers are technically true, the industry is not particularly upbeat about flows. It has been more upbeat since September 2008, but that's not saying much," commented Singapore-based Stephen Diggle, a founder of Vulpes Investment Management. Assets there fell rapidly between September 2008 and September 2009 and since then it has been sideways.
The most popular strategies, according to the SFC survey, were equity long/short, a traditional favourite in Asia, and multi-strategy. Acording to Eurekahedge arbitrage/fixed income gave the best return in 2010 at 13.97%. Lee at Man Investments thinks in future the most successful managers will be those seeking alpha extraction.
"In the Asian hedge fund industry during 2005-07 when markets were very bullish, there was a lot of beta chasing… as lots of funds are Asian long/short funds," Lee stated. "But really they are 100% long funds and so returns were easy. But in difficult times, as the saying goes, ‘when the tide goes out you know who is swimming naked'. So going forward, for those setting up shop or having survived the crisis, they should seek alpha extraction rather than just beta," she added.
Gordon at BNY Mellon believes that the ability to attract institutional investors coupled with performance is important. He also said this is increasingly achieved by demonstrating adequate risk management and transparency. "Several managers have gone from small to relatively large within 12-18 months due to setting up an institutional infrastructure and attracting institutional investors. For example, not just superior alpha but also operational infrastructure, procedures, management of risk and transparency," noted Gordon.
"This trend is likely to accelerate in 2011 as a number of high-profile funds folded during the first half of 2010 and a multitude of insider trading cases emerged in the latter half," continued Gordon. "Before, managers preferred to operate in a 'black box' – 'don't worry, I will manage your money and tell you what the return is'."
The results of the SFC survey highlight the importance of institutional investors to hedge funds. Pension plans, financial institutions and other investment funds comprised 53% of investors. Most investors are from the Americas and Europe, which combined represented over 60% of AUM in Asian-located funds.
The competition between funds for investors may lead to a further industry shake-up. Lee predicted that mid-sized managers may find themselves squeezed by the burdens of increased regulation to the benefit of large and boutique funds.
"After 2008 we saw some consolidation – bigger managers are getting bigger or you have niche boutique managers with a focused strategy," she commented. "These two will survive but mid-size managers (typically a few hundred million to a billion US dollars in size) will struggle as they find they are increasingly being regulated and need to add more infrastructure around their business. They will struggle in terms of these higher costs to run their business."
http://www.hedgefundsreview.com/hedge-funds-review/news/2038542/prop-traders-switching-hong-kong-hedge-funds-boost-industry#ixzz1OrArHRNq
