The Value of Investing in China: The 2010 Asia Hedge Fund 25

Value Partners jumps to the top of our ranking of the biggest Asia-based hedge fund firms.


To say that Value Partners had a good year would be an understatement. Since April 2009 the Hong Kong–based hedge fund firm’s assets under management have almost doubled, to $5.7 billion. And to make up for a disastrous 2008, when many of its funds plunged more than 40 percent, Value Partners posted returns as high as 117 percent last year.

After three years at No. 2, Value Partners takes over the No. 1 spot in the Asia Hedge Fund 25, Institutional Investor’s ranking of the largest Asia-based single-manager hedge fund firms. But its dramatic growth in 2009 had little to do with investor inflows.

“We had minimal net subscription last year, but fund performance contributed a lot to the increasing assets under management,” says deputy CIO Louis So.

For that performance, publicly traded Value Partners owes only so much to China’s recent bull market. In 2009 the firm’s funds far outstripped the Hang Seng index, whose 52 percent rise doubled that of the Standard & Poor’s 500 index. Value Partners’ flagship, the $812 million Classic Fund, gained 82.9 percent, while its $127 million Chinese Mainland Focus Fund gained 86 percent.

Like roughly half of the firms in the Asia Hedge Fund 25, Value Partners relies on a long-short equity strategy. It takes what So calls a contrarian, bottom-up approach to picking Asian stocks, with a focus on Greater China. Last year alone the firm’s 23-member team made 2,500 company visits.

Value Partners’ funds tend to be long-biased. But as of this spring, it had hedged most of its offerings by selling index futures. It can also hedge up to 10 percent of individual stocks in its portfolio, So says.


With the Chinese economy cooling — the Shanghai Stock Exchange composite index was down more than 20 percent this year through May — Value Partners has boosted cash levels. Through May the Classic Fund and the Chinese Mainland Focus Fund were flat for the year. But So says Value Partners is on the lookout for bargains: “For a long-term investor like us, we are seeing some good buying opportunities.”

Assetwise, Asian hedge funds are rebuilding after a year of devastating losses and redemptions. As of April 1 the firms in the Asia Hedge Fund 25 managed $36.1 billion in assets, up 19.9 percent from a year earlier. In the first quarter of this year, however, Asian-focused hedge funds saw $700 million in net redemptions, according to Chicago-based Hedge Fund Research. During the same period the $1.67 trillion global hedge fund industry took in $13.7 billion.

Like their counterparts in Europe and North America, Asian hedge funds are consolidating, says Ted Lee, a Hong Kong–based managing director for New York’s Blackstone Alternative Asset Management, which oversees $28.6 billion in funds of hedge funds. Sure enough, several small firms on last year’s list have dropped off, while most of the bigger players have grown or held their ground.

“You have managers who have hit their capacity and closed on the large side but other guys who are starving for capital and eventually disappearing,” says Lee, who is responsible for manager selection and monitoring.

When it comes to performance, the Asia Hedge Fund 25 had a strong 2009 that erased most of the previous year’s deep losses. But as a group, Asian hedge funds lagged their global peers and the major equity indexes. The HFRX Asia composite hedge fund index climbed 16.8 percent in 2009, versus 20 percent for the HFRI composite index. As of the end of May, neither index had cracked 1 percent — but at least Asian hedge funds beat developed equity markets. During the first five months of 2010, the Nikkei 225 and the S&P 500 indexes lost 7.4 percent and 2.3 percent, respectively.

If 2009 wasn’t a great year for Asian hedge funds, that had a lot to do with the sheer volume of redemptions. Even when they perform well, locally founded firms are vulnerable to withdrawals because they often don’t gate their funds. Vincent Duhamel, CEO of Hong Kong–based fund-of-hedge-funds firm Sail Advisors, says some relatively large Asian hedge funds shrank from $500 million to $50 million in just six months. “Nobody had any capital to deploy when the markets started to take off again,” adds Duhamel, whose firm oversees $2.2 billion.

One bright spot — for a change — is Japan. After hedge funds there turned in the worst performance in 2009 among all the regions and countries tracked by HFR, the HFRX Japan index climbed 5 percent this year through May.

Leading the way in Japan is Tokyo-based Sparx Group Co., which falls to No. 2 after leading the Asia Hedge Fund 25 for four consecutive years. The publicly traded firm, whose assets grew 7.4 percent for the year through March, covers all of Asia through its three subsidiaries: Sparx Asset Management Co., Hong Kong–based PMA Capital Management and Cosmo Investment Management Co. of Seoul, South Korea.

Because Japan itself offers limited growth opportunities, Sparx founder and CEO Shuhei Abe says that his firm is investing in Japanese companies that serve the pan-Asian market. Sparx is also backing smart-energy-grid technology — on the grounds that Japan is a world leader in products such as hybrid cars and lithium-ion batteries. In another move, Cosmo recently applied to market its long-short funds to South Korean retail investors. “Cosmo is an institutionally driven company that will deliver institutional-quality products to retail,” Abe says.

Climbing to No. 3 from No. 5, thanks to a 44 percent increase in assets, Singapore’s Arisaig Partners saw its $1.4 billion Asia Fund gain 8 percent on the year as of April. The long-only firm is still recovering from 2008 losses that averaged an estimated 51 percent.

Rounding out the top five are two firms that were not ranked last year. Claiming No. 4, with $2.5 billion in assets, Beijing-based Hillhouse Capital Management heralds the arrival of mainland China as a hedge fund player. Founder and managing partner Lei Zhang received his MBA from the Yale School of Management in 2002. At Yale, Zhang worked for David Swensen, CIO of the Yale University Investments Office, which seeded Hillhouse’s 2005 launch. This January, Zhang returned the favor by pledging a lucky $8,888,888 to the Yale School of Management — its largest gift ever from a graduate.

At No. 5, Tokyo-based Bayview Asset Management Co. has made a point of doing things differently. In a country where domestic investors prefer global names, $2.1 billion Bayview won seed capital from Japanese pension funds and insurance companies for the 2002 launch of its Japanese long-short fund. One of the few firms in Japan with a license to manage domestic pension fund assets and investment trusts, it built a strong following at home before marketing abroad, says executive officer Rieko Shimojo. Today about 80 percent of Bayview’s assets come from Japanese investors.

Bayview has never accepted investments from funds of hedge funds, a decision that paid off in 2008 and 2009. “We didn’t suffer from those people coming in and out — the hot money run by funds of funds,” Shimojo says.

Conceding that domestic investors won’t be in a position to shore up its equity market anytime soon, Shimojo says Japan needs more capital from China and other Asian countries. As of this spring, Bayview had yet to meet with any Chinese investors. But one of its investment themes is Chinese forays into Japan, including acquisitions of Japanese firms. For example, Nanjing, Jiangsu–based Suning Appliance Co. now owns almost 30 percent of Japanese electronics retailer Laox Co. This year, Laox will open three stores in China.

Japan’s activist hedge fund sector went bust about five years ago, but a few shops still ply the trade. One is Tokyo-based Asuka Asset Management Co. (No. 20, with $530 million), whose activist Value Up Fund is a joint venture with manager Yasunori Nakagami. After climbing 10 percent in 2009, the $100 million fund was up 8 percent this year through late May. Nakagami says part of Value Up’s strategy is to exploit arbitrage opportunities in smaller Japanese companies by introducing modern management techniques. The fund fills a void in the Japanese stock market, where herding and short-term thinking are the norm, Nakagami asserts: “Those small to medium caps need to be supported by responsible long-term investors, but there are few long-term investors in our capital markets.”

Like Bayview and Sparx, Asuka — which also manages long-short equity, multistrategy and commodities funds — is looking to China. Vice president Kentaro Nakata says the Value Up Fund likes Japanese businesses with potential to profit from China’s extraordinary growth: “If you have expertise in transforming these Japanese companies into more regional plays, then it proves to be rewarding.”

According to HFR, equity hedging accounts for almost 72 percent of hedge fund investing in Asia. Vaulting onto the Asia Hedge Fund 25 at No. 17 is Shanghai-based Greenwoods Asset Management Co., whose long-short Golden China Fund surged 148.4 percent in 2009. Several firms pursued macro and event-driven strategies, with varying success. At Hong Kong’s Lim Advisors (No. 12), the Asia Multi-Strategy and Asia Special Situations funds gained 20 percent and 17.3 percent, respectively. But the Merchant Commodity Fund run by Singapore-based Aisling Analytics (No. 11) was up only 5.2 percent — and fell 14.9 percent in the first three months of this year.

In China the long wait for hedging tools is over now that Beijing has approved the launch of stock index futures, short-selling and margin trading. “It isn’t that far away that we’ll see true hedge funds in the China market — not just trading through Hong Kong,” predicts Lee, who spent eight years working in the fund-of-funds group at Sparx in Hong Kong before joining Blackstone in 2009.

One firm that is excited about this development is Hong Kong’s Pacific Alliance Investment Management (down three places, to No. 10). After sailing through 2008 with a 7.6 percent return, its $1.2 billion Pacific Alliance Asia Opportunity Fund earned 17.6 percent last year. Pacific Alliance co-founder, managing partner and group CIO Chris Gradel, who manages the nimble arbitrage fund, says he aims to capitalize on inefficiencies and dislocations throughout Asia.

For Gradel, who doesn’t care which way markets move, the newly hedged Chinese A-share market is a perfect opportunity. “Once equity futures and short-selling are introduced, a lot of mispricings get arbitraged out,” he says. “As it unfolds, we want to be playing in the early stages of that opportunity set.”

Looking ahead, one of the biggest challenges for Asia’s hedge fund industry is foreign liquidity flows to and from the region. Sail Advisors CEO Duhamel says the redemption problem is compounded by the fact that there aren’t enough big local institutional investors to anchor the Asian market.

“Often they’re either currency boards or currency reserves, or they have a mandate to invest on a global basis, away from their home country,” Duhamel notes.

Before 2008, he argues, private banks and others made the mistake of buying into the growth story of Asia when they should have been looking for alpha. Duhamel says European and North American institutions will be next to invest in Asian hedge funds, but he doesn’t expect money to start flowing until the end of the year. “There’s probably a lot of talk, but we haven’t seen a lot of walk,” he adds.

Blackstone’s Lee says the proliferation of hedging tools and counterparties — combined with maturing ex-Japan markets — will make Asia a force in the global hedge fund industry. But to get there, Asia will need to continue to develop and attract new investment talent. It should help that big multistrategy firms such as New York’s Highbridge Capital Management and Stamford, Connecticut–based SAC Capital Advisors have been in Asia since early last decade.

“That’s been engendering talent, mentoring talent — and breeding the new wave of promising hedge fund managers,” says Michael Garrow, a vice president in Blackstone’s fund-of-funds group in Hong Kong. “I’m optimistic that the general quality level is going to improve.”

Right now, Value Partners is applying its talent for stock picking to the Chinese property market. Fearing a speculative bubble, Beijing recently took steps to cool down real estate sales. Value Partners’ So says one result was that this spring some big Chinese developers were trading at discounts of 30 to 70 cents on the dollar. On the assumption that money will eventually flow back to property because most Chinese aren’t allowed to invest overseas, Value Partners is waiting for the market to hit bottom later this year. “We are trying to identify long-term winners,” So says.

But as Value Partners scours Asia for value stocks, the heavy hand of Beijing is a worry. In a host of industries — steel, for instance — the Chinese government can control supply and demand by commanding factories to raise or lower production. No matter how good a company’s fundamentals are, So says, this intervention affects share prices: “It will kill you, even though you’re a very good stock picker.”