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The Brave New World of Hedge Funds in Asia
Paul Smith Hong Kong, May 2011
• Shape of the Global Industry
• Shape of the Asian Industry
• Winners and Losers in Asian Hedge funds
• Foreign vs Local
• Developments in Asia Hedge Fund regulation
• Challenges ahead
Introduction
2
February 2011 AuM
(US$bn)
Performance-based
growth/(decline) (US$bn)
Net assetflows
(US$bn)
March 2011 AuM
(US$bn)
% Change in assets
Hedge Funds
1734.9 4.5 13.9 1753.4 1.1%
By Geographic mandate
Asia ex-Japan 114.2 1.0 0.5 115.7 1.4%
Japan 15.6 (0.1) 0.1 15.6 -0.1%
Europe 392.2 0.6 4.5 397.3 1.3%
Latin America 61.3 0.5 0.4 62.2 1.5%
North America 1151.6 2.5 8.3 1162.4 0.9%
The Global Industry
Source: Eurekahedge April 2011 Asset flows update
3
The Global Industry
57 6169
81
105
119126
134 135142 147 151
161
137
117 114106 109
0
20
40
60
80
100
120
140
160
180
$0.00
$200.00
$400.00
$600.00
$800.00
$1,000.00
$1,200.00
$1,400.00
Jun-
02S
ep-0
2D
ec-0
2M
ar-0
3Ju
n-03
Sep
-03
Dec
-03
Mar
-04
Jun-
04S
ep-0
4D
ec-0
4M
ar-0
5Ju
n-05
Sep
-05
Dec
-05
Mar
-06
Jun-
06S
ep-0
6D
ec-0
6M
ar-0
7Ju
n-07
Sep
-07
Dec
-07
Mar
-08
Jun-
08S
ep-0
8D
ec-0
8M
ar-0
9Ju
n-09
Sep
-09
Dec
-09
Mar
-10
Jun-
10S
ep-1
0D
ec-1
0
Source: ‘Once titanic industry turns around to grow by 4.82%’ Hedgefundintelligence.com March 3rd 2011
Fund of Funds Billion Dollar Club assets evolution since 2002
• 33% of the 109 billion dollar FoFs experienced outflows in 2010
Size (US$ million)
4
The Global Industry
0
10
20
30
40
50
60
70
80
90
100
2003 2004 2005 2006 2007 2008 2009 2010 2011
HFRI Fund Weighted composite Index - Percentage of constituent funds at high watermark (HWM), 2003-Q1 2011*
% funds at High Watermark
Max: 88% in 2007Min: 50% in 2009
Still in recovery
• 65% of funds have reached their individual high water marks
Source: Hedge Fund Research, global Hedge Fund Industry Report –first Quarter 2011 www.hedgefundresearch.com
5
We are boutique not institutional sized
* Asia-Pacific including Japan
• Hedge fund leverage still below 2007 peak• 935 new launches in 2010 – most since 2007
Out of $130bn, i.e.35% managed by 15 managers
Source: Hedge fund Intelligence
6
The Asian Hedge Fund Industry
Source: Eurekahedge
Growth of the Asian hedge fund industry AuM growth in recent months
7
The Asian Hedge Fund Industry
0
50
100
150
200
250
300
350
2005 2006 2007 2008 2009 2010 Feb-11
LaunchesClosures
• Dream is still alive
• Average age of Asian Hedge funds is 3.7 yearsSource: Eurekahedge
Number of Funds
Launches and closures across Asian Hedge Funds
8
The Asian Hedge Fund Industry
History- Late starter - shorter history compared to US/Europe- Smaller startups and smaller funds- Fewer 2nd or 3rd generation managers- From fringe to core allocation for global investors
Market and participants
- ‘Asia’ is not a single market…14 countries- Ideal size smaller…sweet spot $250m- Still a lot of boutiques rather than asset-gatherers- Liquidity is fickle, shorting is harder, less leverage- Few domestic institutions….retail/foreigners dominate- Less M&A activity…but growing
Business and funding
- Harder to get started…but easier/cheaper to operate- Traditionally reliant on European FoF…now Madoff’d- No domestic Asian institutional investor base- Independent administration, low operational risk
Does the Asian hedge fund industry have unique characteristics?
9
The Asian Hedge Fund Industry
Lots of GDP growth, lots of volatility, no fees, …..and no return
Annualised return 0%
Annualised volatility 21%
0.4
0.6
0.8
1
1.2
1.4
1.6
12/1/1987 12/1/1992 12/1/1997 12/1/2002 12/1/2007
MSCI Asia Pacific - Indexed returns since 1988
What has passive exposure to Asian markets delivered?
Source: Bloomberg
10
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
Dec-00 Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09
Indexed Returns – Asian hedge funds vs. MSCI Asia
Eureka Asia Pacific Hedge Fund Index (incl Japan)MSCI Asia Pacific
Alpha in Asia…but take with a grain of salt
Compounding works……given time
The Asian Hedge Fund Industry
Source: Eurekahedge/Bloomberg
11
Asian Hedge funds Winners & Losers
What do clients want?Priority Local Investors Foreign Investors
High Risk Investment
1st choice Greater China Equities Long Only Equity
2nd choice N/A Event Driven
Low Risk Investment
1st choice N/A N/A
2nd choice N/A Fixed income/RV/Vol
Small or large AUM
- Small or Large Large only
Start Ups - Y N
12
Asian Hedge funds Winners & Losers
Top 10 Myths of Asian hedge fund investing (maybe…..)
Myths True False1 Managers are all about Beta and don’t protect capital
2 Managers don’t understand risk
3 Managers are mostly equity long-short, and even those are long biased
4 Liquidity is an issue
5 Shorting is difficult
6 Restrictions on foreign investment, poor information
7 Debt markets are undeveloped
8 Managers’ operational infrastructure is weak
9 Managers are not transparent and different due diligence is required
10 Regulatory oversight is weak
13
Asian Hedge funds Winners & LosersWhat’s recently changed in Asian hedge funds?…..the paradoxes
14
Asian Hedge funds Winners & Losers
China travel
Urbanisation
Motivated/distressed sellers
Active stockpicking (not benchmarks)
Local Asian franchises
Consumer, education, healthcare, environment
Cheap US companies with Asia exposure
Seeding/acceleration capital
Trade finance
Illiquid vs. liquid,
Smaller vs. large,
Boutique vs institutional
RMB liberalisation/ China big bang
Family co-investments
China A shares 50% off peak
Frontier markets
Asian High Yield bonds
Asia ex J volatility
Asian hedge and long-only funds
Japan restructuring!
Asian private equity fundsAsian fx
Asian opportunities – prepare to be a little different
15
Asian Hedge funds Winners & Losers
• 59% still not to scale• Is <$100m enough in the current market?
Breakdown of the hedge fund population by fund sizes
Source: Eurekahedge
<$20m 37%
$21-50m22%
$51-100m11%
$101-200m14%
$201-500m13%
$501-1000m
2%
>$1000m1%
February 2007
<$20m 33%
$21-50m26
26%
$51-100m14%
$101-200m13%
$201-500m9%
$501-1000m3%
>$1000m2%
February 2011
16
Asian Hedge funds Winners & Losers
Long/Short Equities
62%
Macro5%
Multi-strategy11%
Others1%
Relative Value2%
Arbitrage4%
CTA/Managed Futures
5%
Distressed Debt4%
Event Driven5% Fixed Income
3%
February 2007
Long/Short Equities
52%
Macro5%
Multi-strategy13%
Others2%
Relative Value4%
Arbitrage4%
CTA/Managed Futures
6%
Distressed Debt1% Event Driven
8% Fixed Income5%
February 2011
Changes in the strategic mix of Asian hedge funds by assets under management
Source: Eurekahedge
17
Asian Hedge funds Winners & Losers
United Kingdom
21%
Hong kong17%
United States15%
Australia12%
Singapore10%
Japan6%
France4%
Switzerland2%
Luxembourg1%
Channel Islands
1%
Others11%
February 2007
United Kingdom
22%
Hong kong22%
United States14%
Australia10%
Singapore9%
Japan5%
France4%
Switzerland2%
Luxembourg1%
Channel Islands
1%
Others10%
February 2011
36% UK & US 32% UK & US
Decline of Australia
Source: Eurekahedge
Head office location by numbers of funds
18
Asian Hedge funds Winners & LosersAsian hedge fund fees by launch year Market share of top Asian hedge fund prime brokers by
assets under management
Not weighted by capital – large launches charge fees
Source: Eurekahedge
19
Foreign vs Local
• Soros• Viking• Moore Capital• GLG• Fortress
• Asian sleeves of Global portfolios• Are they here to stay this time?• Are opportunities better than those at home?
20
Foreign vs Local
• 2010 – Nick Taylor, Senrigan– $200m seed, $1bn today
• 2010 – John ho, Janchor– No seed, $750m today
• 2011 – Morgan Tse, Azentus– GS spin out $1bn start up
• To come: – Nomura Prop Desk– Highbridge spin out
21
Developments in Asian HF regulation
• 2010 – short selling reporting requirements tightened – Hong Kong
• 2010, October – Sales of securities to professional investors tightened –Hong Kong (most fund managers unaware)
• Ongoing lobbying by AIMA of FSTB for corporate law and tax changes to make HK a fund domicile (HKIMA against this initiative)
• Singapore 2011, tightening of regulations concerning authorisation of fund managers
• Korea – fund of funds to be allowed domestically (maybe….)
22
Challenges Ahead
• Still a poorly capitalized industry
• Selling the dream – 90% of staff should get a proper job
• Flows coming from institutions
• Back to the future – Gentlemen's club, institutional platforms
23
Challenges Ahead
• Collision of two worlds
• Short selling in retail products will come
• ETFs are dangerous
• Hedge Funds to become alternatives again
• AIMA off in wrong direction
All pundits are wrong
24