By GFIA of Singapore
Historical overview
GFIA began coverage of the Asian hedge funds industry in 
September 1998. At that time the industry was tiny and all participants mostly knew each other. The Asian crisis was still unfolding, and the industry was a collection of maverick specialists. It was another five years before the industry achieved critical mass, in both size and number of managers. The industry was then characterized by investment specialists rather than financial entrepreneurs. Capacity was easy to access even in top performing managers; the constraints were access to international capital, and the availability of good service providers.
Global allocators began to research Asian hedge funds in 2003/4, and followed quickly with allocations. While the industry grew rapidly, inflows concentrated in the better known managers due to allocators’ need for comfort. In 2005, GFIA counted 136 hedge funds with more than US$200m under management1. By end 2007, AsiaHedge reported 35 hedge funds with over US$1bn of hedged assets run from Asia.
2008’s financial crisis saw serious headwinds confronting the industry, resulting in a maelstrom of redemptions. The subprime crisis in the US developed into a global liquidity squeeze, leading to widespread redemptions. Allocations, regardless of whether tactical in nature or not, were retracted quicker than they were made. Performance was no protection against redemption. Larger funds were hit harder than most, and many firms’ AUMs were more than halved. Funds running more liquid strategies (of which Asia had a larger proportion) were easy targets for “ATM-effect” redemptions, and experienced greater outflows than (generally much larger) illiquid funds. The number of fund closures spiked and several global firms exited the region.
Pressures abated in 2009 although the overall environment was still capricious. There was some resumption of inflows but the industry in aggregate did little more than to stabilize. Attrition rates (of the number of funds losing, as a percentage of the total) remained high at 11%, continuing from 10% in 20082. Post Madoff, there was increasing pressure on Asian hedge funds to institutionalize their operational infrastructure and, at least nominally, improve transparency.
While salvation did come in 2010 to some extent, it did not reinvigorate the industry as expected. Inflows continued but in a very limited fashion. Prop desks were spun off from de-risking investment banks, new management firms incepted, and new funds launched. Global allocators and hedge funds returned, in classic cyclical fashion, to set up offices in Hong Kong/Singapore, cementing Asia’s position as one of the global financial hubs.
2010/2011, the consolidation years
2011 continued the trend from the previous year as the industry struggled to emerge from consolidation. Whatever fresh capital that fl owed into the region favoured larger funds, despite the empirically weaker performance and generally lesser transparency. GFIA estimated at end-2011 only 30 managers3 (10 indigenous firms and 20 global managers) with over US$1bn of hedged Asian assets, a shrinkage of 45% compared to six months earlier. GFIA’s research suggests that the fall was a result of overall net outflows of capital from the region during 2H 2011, as well as a continuing trend of decreasing transparency from larger managers.
2012-2013 saw the industry continuing to stagnate, in terms of the emergence of new managers as well as fundraising in general. As of June 2013, the total AUM of the industry was an estimated US$138bn, nearly flat from the December 2012 figure of US$135bn, and still down compared with US$147bn at end-2011. We counted only 20 Asian managers with assets over US$1bn and saw cases where new fund launches were delayed or downsized. However, the rising sentiment in the waning months of 2012 (due to positive signs of recovery in the US and a paradigm shift in Japan) has continued into 2013, albeit with a few stutters. Select markets in Asia saw impressive rallies up until a rerating in May-June, brought on by the spectre of the Fed cutting bond purchases. Although markets are seeing the return of some divergence in security pricing, predicting where the Fed will go next seems to be foremost in investors’ minds, adding market-churning volatility.
It remains to be seen whether the Asian hedge fund industry is recovering structurally, or consolidating into a different beast entirely. Allocations, while moving away from the unrelenting focus on behemoth managers, are still concentrated in few names; the 80-20 rule has regressed into something closer to 90-5, and multi-manager platforms, fee discounts, as well as alternative investment structures are increasingly common. GFIA is certainly seeing more interest in investment talent in Asia from international investors, in particular from the USA, and we are optimistic that the pipeline will deliver some level of allocations. The environment for launches remains challenging – although that may actually benefit the industry, according to AsiaHedge, who assert that “only launches by managers with significant reputation and track record, institutional background and extensive teams, will be able to take off”4. The era when the Asian hedge fund industry was inhabited solely by skilled investment mavericks is long gone!
Asian hedge funds as an asset class
Source: AsiaHedge, EurekaHedge; Analysis: GFIA
Universe of returns taken from 1142 Asian, emerging markets and global funds, out of which 760 are live funds. Broad market funds such as emerging markets and global funds are included to provide more statistical significance for certain strategies.
Predictably, inclusion of dead funds’ performance leads to lower annualized returns for most strategies.
Hedge funds showed out-performance over the market benchmark
Distressed debt, CTA/Managed Futures and Fixed Income round out the top 3 performing buckets
Funds overall outperformed the market benchmarks over the past 5 years. Distressed securities, long only equities, fixed income round out the top 3 performing buckets. As in early iterations of our Asia Note, we truncated the timeline of returns to May 2008 – May 2013 in order to focus on the swings between a market dislocation, a seeming recovery, and subsequent stagnation. It is worth noting the capital preservation capability of the funds during the crisis as well as the subsequent consistent recovery. The recent macro-driven volatility in the markets contributed to the sliding returns in most Asian managers, especially those managing fixed income, long only and event driven funds.
Most strategies experienced a decline in correlation in 2013
Based on 1 year correlations with MSCI Asia Apex
Overall, there is a clear downward trend with the correlations to the MSCI Asia Pacific Index year-to-year. More specifically, in 2013 all strategies, with the exception of macro, became less correlated with the MSCI Asia Pacific Index, suggesting that the bottom up strategies are starting to play out the way that managers intend, and are returning to fundamentals. CTA/Managed futures and distressed securities’ correlations once again plunged in 2013.
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“The fate of Asian hedge funds is irrevocably tied to that of their underlying equity markets; Asia, like other EM, has disappointed investors this year (with the probable exception of Japan)”
Really? Aren’t hedge funds supposed to be able to use alternative and sophisticated strategies to deliver returns that are not correlated to the wider market? Seems a pretty basic principle.