The 2011 Asia Hedge Fund 25: Reawakening the Dragon

For a second year running, Value Partners claims the top spot in the Asia Hedge Fund 25, Institutional Investor’s sixth annual ranking of the biggest Asia-based single-manager hedge fund firms.


After a year of dramatic asset growth, Value Partners is gearing up for expansion. But even as the Hong Kong–based hedge fund firm has its eye on Southeast Asia, Greater China will remain a priority. “We don’t look at ourselves as a Hong Kong manager as such,” says CEO Sheung Lai (Jimmy) Chan, whose company oversees $8.6 billion in assets. “I think we have to look at ourselves as a China fund management firm.”

See the full ranking of Asia’s Top 25 hedge funds here.

In China, Value Partners already manages a hedge fund–like private Asian fund for high-net-worth investors through China Ping An Trust & Investment Co., a branch of Ping An Insurance (Group) Co. of China. With six Shanghai-based analysts dedicated to the A-share market, the 120-employee firm must now recruit staff to build its Chinese distribution. Publicly traded Value Partners, a self-described contrarian stock picker whose assets surged by more than 50 percent in the 12 months ended April 1, is also acquiring and starting new businesses. It recently agreed to buy a majority stake in Taiwan’s KBC Concord Asset Management Co. from KBC Asset Management, a subsidiary of Brussels-based KBC Group. And in the fourth quarter it plans to launch a Chinese private equity fund management company with Yunnan Industrial Investment Holding Group.

For a second year running, Value Partners claims the No. 1 spot in the Asia Hedge Fund 25, Institutional Investor’s sixth annual ranking of the biggest Asia-based single-manager hedge fund firms. This comprehensive survey reveals the forces that are driving the hedge fund industry in a region that will only grow in importance.

Over the past year, Asia-based hedge funds have continued their swift recovery from the crisis of 2008, when many of them suffered shattering losses and redemptions. They also showed a new maturity that has helped make Asian managers popular with savvy investors. As of April 1 the Asia Hedge Fund 25 managed $47.5 billion, a 31.6 percent increase in one year.

“The Asian hedge fund industry is on more solid ground than it has been since the onset of the financial crisis,” says Kent Clark, New York–based managing director of the alternative investments and manager selection group and CIO of hedge fund strategies at Goldman Sachs Asset Management.


As evidence, Clark points to the appearance of strong new players in 2010 and early 2011. One example is Hong Kong–based Azentus Capital Management (tied for No. 13), Asia’s first $1 billion hedge fund launch in recent memory. Clark also notes the continued shakeout of managers that had challenges with performance or organization, and the fact that a handful of established firms are moving toward the next growth stage.

In another sign that the Asian hedge fund industry is coming of age, long-short equity managers are losing their traditional dominance. Because the vast majority of such managers in Asia have tended to be more long than short, they’ve left themselves vulnerable to events like the market collapse in 2008. Now a diversity of investment styles is becoming the norm.

About half of the Asia Hedge Fund 25 firms deploy long-short equity strategies, but besides multistrategy shops Azentus and Lim Advisors (No. 9), the list also includes currency specialist Ortus Capital Management (No. 5), commodities trader Aisling Analytics (No. 11), event-driven Senrigan Capital Management Group (No. 15) and macro fund Dymon Asia Capital (No. 20). “We’re very bullish on Asian managers and the opportunity set, partly because both seem better today than in the past and offer strong alternatives to Western-based funds,” Clark says.

As they carefully rebuild in Asia after pulling back in the wake of the crisis, big U.S. and European hedge funds are looking for growth they can’t find elsewhere. These firms, whose Asian staffs are a mix of locals and expats, have dispatched some of their most senior people to the region. In November, New York–based D.E. Shaw & Co. sent executive committee member Julius Gaudio to run its Hong Kong office, which opened in 2007 and is one of the firm’s six Asian outposts.

“We’ve found Asia interesting over the past two decades because asset mispricings have sometimes been significantly more dramatic, and at other times significantly less so, than in the States or Europe,” says Gaudio, who is co-head of $19 billion D.E. Shaw’s worldwide asset management business. “This lets us add value in a global portfolio by dialing up or down our Asian positions as circumstances warrant.”

For large hedge fund firms, gleaning market intelligence from the source matters more in Asia than it used to, says Tim Rainsford, managing director for Asia at Man Investments, the asset management division of $71 billion, London-based Man Group. “Increasingly, we will see those larger funds establishing trading operations in Asia,” predicts Rainsford, who works out of Hong Kong.

Including Value Partners, 14 of the firms in this year’s Asia Hedge Fund 25 ranking are based in Hong Kong, while six make their homes in Singapore. Although Hong Kong still rules as an Asian hedge fund center and longtime rival Singapore attracts its share of business, Tokyo is on the decline and remains in third place. As in 2010 just four Japanese firms make a showing, though they do include heavyweights Sparx Group Co. (No. 2) and Bayview Asset Management Co. (No. 6).

Meanwhile, seven of the top 25 were unranked last year, and four of these manage more than $1 billion each. Some firms don’t return because they are too small, but others have wound down. Singapore-based Artradis Fund Management, which placed ninth in last year’s ranking, with almost $1.4 billion in assets, closed in February after two money-losing years. But three months later co-founder Stephen Diggle launched a new hedge fund called Vulpes Investment Management.

When it came to performance, however, Asia-based managers didn’t scale the same lofty heights last year as they did in 2009, when several funds earned triple-digit returns. Among last year’s leaders was APS Asset Management of Singapore (No. 10), whose $1.5 billion Asia-Pacific Hedge Fund netted 32.5 percent. “It was certainly a more difficult market than 2009, in that the easy returns that may have been associated with a rebound in the credit markets were harder to come by,” says Dan McNicholas, Hong Kong–based director and head of Asia-Pacific equity financing sales at Bank of America Merrill Lynch.

On average, Asia-focused hedge funds delivered returns similar to those of the global hedge fund industry, whose challenges in 2010 included coping with new regulations, reduced leverage, sovereign debt crises and investor skepticism. The HFRX Asia composite hedge fund index climbed 10.5 percent last year, compared with a 10.25 percent rise for the HFRI fund-weighted composite index. Both trailed the MSCI all-country Asia ex-Japan index, which was up 16.99 percent in 2010.

Capital keeps flowing to the region’s hedge funds, which offer investors access to China. And as the Asian hedge fund industry matures, its investor base is becoming increasingly institutional. In the last three months of 2010, according to McNicholas, the bulk of the money came from U.S. pension funds. The shift toward institutional investors favors big and established firms, but McNicholas doesn’t think smaller managers are doomed.

“We are seeing some of the larger managers close to new money, and therefore there’s a waterfall effect to midtier and small-tier players,” he says.

For Value Partners, 2010 turned out better than expected. Despite much volatility in the first half of last year, CEO Chan says, net subscription hit a record $1.3 billion. The average asset-weighted return for Value Partners’ funds last year was about 19 percent. The firm’s flagship Classic Fund, whose assets more than doubled, to $1.9 billion, for the year ended April 1, gained 20.2 percent; its $197 million long-short equity Hedge Fund rose 18.2 percent.

Value Partners’ long-biased funds usually stick to index hedging, Chan explains. Although the firm can hedge individual stocks in its Hedge Fund, China maintained restrictions on stock-level shorting after introducing indexed futures last year. Even in Hong Kong, Chan says, only about half of stocks can be shorted, and there’s a limited lending pool for short-selling.

So far in 2011, Value Partners — most of whose funds are long-biased — has seen more interest than last year from foreign institutional investors. U.S. inflows to its Hedge Fund are healthy, but a lack of enthusiasm from European institutions leads Chan to speculate that the debt crisis back home is making them more cautious.

Greater institutional interest in Asian hedge funds hasn’t necessarily translated into meaningful inflows for everyone, says Max Gottschalk, co-founder and head of Asia-Pacific at $8.6 billion, Lausanne, Switzerland–based fund-of-hedge-funds firm Gottex Fund Management. But Gottschalk, who moved to Hong Kong earlier this year, thinks that will change as institutions follow through with their due diligence. “We’ve also seen the larger sovereign wealth funds in the last few months actually looking for Asia-based hedge fund managers,” he says.

Keeping its No. 2 position for a second consecutive year, Tokyo-based Sparx has found a way to benefit from Japan’s recent earthquake, tsunami and nuclear crisis. The firm manages $8.1 billion through three subsidiaries in Tokyo; Hong Kong; and Seoul, South Korea. In a sign of the Japanese hedge fund industry’s woes, Seoul-based Cosmo Investment Management Co. supplied the bulk of Sparx’s 57 percent asset growth.

A year ago, Sparx, 70 percent of whose assets are from non-Japanese investors, including pensions and endowments, launched an environment and green-tech investment strategy. Because Japan must shift toward renewable energy to replace nuclear power facilities damaged by the earthquake, founder and CEO Shuhei Abe contends, the $300 million fund has a rallying point. “I plan to eventually extend this theme to cover all of Asia,” he says of renewables, noting that Sparx is also considering private equity–type investments in the Japanese reconstruction.

Before the earthquake hit, publicly traded Sparx had embarked on what Abe calls its One Asia strategy. In late March it announced that it was rebranding Hong Kong–based PMA Capital Management under the Sparx Asia name. Sparx also recently launched the One Asia Long-Short fund with $10 million of its own capital. The fund’s six-member investment team — consisting of two professionals from each Sparx company — was originally located in Tokyo but has since moved to Hong Kong.

Abe says Sparx now has a way to invest in Asia as a single economic system and capitalize on the region’s move away from simple linear growth. “I think that is changing quite rapidly, even in growth countries like China,” he argues. “You cannot just participate in China’s growth by investing in the index.”

Japan is no longer home to many major hedge funds for good reasons. Not only is its regulatory environment difficult, Man’s Rainsford says, but opportunities for domestic hedge funds have shrunk. “That being said, many hedge fund managers continue to focus on Japan,” he explains. “They just do it from a different location.”

Moving up to No. 3 after finishing fourth last year, Beijing-based Hillhouse Capital Management doubled its assets, to $5 billion. Yale University–educated Lei Zhang, founder and managing partner of mainland China’s biggest hedge fund, is a value investor whose flagship Gaoling Fund focuses on Asia. Zhang’s pedigree — he used to work for the Yale University Investments Office, which seeded his firm — has helped him attract U.S. and European endowments and foundations.

Arisaig Partners, a long-only firm based in Singapore, slips from No. 3 to No. 4. As of May, Arisaig’s $1.9 billion Asia Consumer Fund, renamed from the Asia Fund last year to reflect its new focus, had earned a 13.5 percent annualized return since its 1996 inception.

Not ranked in 2010 but jumping onto the list at No. 5, Hong Kong–based Ortus Capital highlights the growing importance of currency trading for Asia-based funds. Ortus’s investors are largely global institutions, including sovereign wealth funds. Managed by Zhongquan (Joe) Zhou, the firm’s $2.3 billion Ortus Currency Program posted a 27.89 percent net return last year.

Two newcomers further illustrate the Asian hedge fund industry’s growing sophistication and its ability to attract serious cash. Azentus Capital — a Hong Kong–based multistrategy firm founded by Morgan Sze, Goldman Sachs Group’s former head of principal strategies proprietary trading in Asia — started running money in April with some $1 billion in assets.

Launched in 2009, Senrigan Capital crossed the $1 billion threshold early this year, when it did a soft close to new investors. Senrigan, whose founder is CIO Nick Taylor, concentrates on event-driven opportunities in mainland China, Japan and Australia. In 2010 its Senrigan Master Fund gained 5.85 percent.

In the aftermath of March’s Japanese earthquake, market-neutral Senrigan showed why $34 billion, New York–based Blackstone Alternative Asset Management deemed it worthy of $150 million in seed capital. When disaster struck, about 40 percent of the firm’s portfolio was in Japan, Taylor says. Stock prices plunged precipitously in the days following the quake, but with help from dynamic trading of options, Senrigan finished March up 1.6 percent (the Nikkei index fell 8.2 percent for the month).

Amid the chaos, Senrigan profited from a takeover bid for a life insurance company whose shares had dropped 5 percent on fears that the deal wouldn’t close. “After exhaustive checking with respect to the post-tsunami actions of the companies and the regulator, we had no doubt at all the deal would close — and at the end of the month, it did,” Taylor says.

Like many Asia-based hedge funds with a mainland China focus, Senrigan operates from Hong Kong because it’s close to the action. But Singapore is also an enduringly popular domicile, partly thanks to its large private banking market. Known to be welcoming to hedge funds, the Monetary Authority of Singapore is poised to introduce regulations that will increase manager oversight.

“There have been regulatory differences, with Hong Kong being somewhat stricter and more similar to regulation in the U.S. and Europe,” GSAM’s Clark says of the long-running competition between Singapore and Hong Kong. “But at this point location seems to come down largely to proximity to the important markets traded for a manager and lifestyle preferences.”

Kok Hoi Wong, founder and CIO of APS, thinks Singapore’s new rules will help draw high-quality managers without stifling growth. He also says current conditions favor midsize hedge funds like his, given that small outfits are having trouble winning capital from wary investors and that big firms are struggling with performance. “They’re probably the sweet spot, given where we stand in the industry today,” Wong says.

On the regulatory front other changes are afoot for Asian hedge funds. Gottex’s Gottschalk has noticed that several Asia-based managers are looking to set up Undertakings for the Collective Investment of Transferable Securities vehicles. By complying with Ucits rules, they can offer European onshore products to European clients, Gottschalk says.

He’s also seeing hedge fund allocations by institutions in South Korea, whose regulators appear to be on the verge of allowing domestic hedge funds. As for mainland China, Gottschalk points out that most hedge funds there are still long-short offerings set up offshore by local managers for offshore investors. “I don’t think anyone expects a huge development in the local hedge fund market immediately,” he says. “But as investors get more familiar with hedge funds, demand should pick up.”

Value Partners’ Chan doubts that Beijing and Shanghai will become serious financial rivals to Hong Kong, as long as the renminbi is not fully convertible. “But we expect there will be more outstanding fund managers in the hedge fund sector, because China is such a big market and there’s so much talent there,” he says.