The world wasn’t kind to Value Partners in 2011. The Hong Kong–based investment firm, which focuses on Greater China, found that its contrarian stock-picking strategy offered little shelter from global market turbulence. As of March 31, Value Partners’ assets under management had fallen more than 9 percent from a year earlier, to $7.8 billion. Its flagship, $1.7 billion, Classic Fund lost 17.2 percent in 2011 — a big letdown after 2010, when it gained 8.1 percent.
Wai Ming (Timothy) Tse, Value Partners’ CEO, says problems in Europe and worries about the U.S. and Chinese economies all played a role. “Bottom-up stock picking didn’t seem to work in such abnormal market conditions,” explains Tse, whose 210-employee firm also has offices in Shanghai and Taipei.
Despite those troubles, publicly traded Value Partners takes the No. 1 position in the Asia Hedge Fund 25, Institutional Investor’s seventh annual ranking of the biggest Asia-based single-manager hedge fund firms, for a third straight year. Value Partners experienced few redemptions last year, and Tse points out that the firm has posted an annualized return of about 17 percent over its 19-year history. “We believe the market will eventually return to normal, as it always did in the past, and value investors will benefit,” he says. (The top 25 firms are listed in the table on page 66; for more data from this survey, visit institutionalinvestor.com.)
Although some Asia-based hedge funds reaped fat returns in 2011, many others struggled with volatility. Those that kept an eye on the macroeconomic picture tended to perform better. Overall, the Asian hedge fund industry held its ground in 2011 when it comes to assets. As of April 2 the Asia Hedge Fund 25 managed $46.7 billion, a one-year decline of just under 2 percent.
Asian hedge funds are more resilient today than during the crisis of 2008, when a surfeit of long-biased managers triggered huge losses from which the region is still healing. “The Asian hedge fund industry has developed so that it has a range of strategies and good managers to rival what’s available in Europe or the U.S.,” says Peter Rigg, HSBC’s Geneva-based global head of alternative investments.
The indigenous talent pool is much better than it was even two years ago, agrees Matt Pecot, Hong Kong–based Asia-Pacific head of prime services at Credit Suisse. Pecot cites seasoned traders who have spun off start-ups from banks’ proprietary trading desks, as well as second-generation managers who worked at hedge funds before launching their own.
Long-short equity funds figure prominently in the Asia Hedge Fund 25 again this year, but other strategies claim six of the top ten spots. Among them, the most dramatic finish is by Singapore-based Dymon Asia Capital, whose $2.7 billion in assets — a $2 billion gain — vault it to No. 6 from No. 20. Led by founder, CEO and CIO Danny Yong, Dymon’s macro fund reportedly gained more than 20 percent in 2011.
“Managers that took a more top-down approach were probably more likely to do well,” says Kent Clark, managing director of the alternative investments and manager selection group and CIO of hedge fund strategies at Goldman Sachs Asset Management in New York.
With $5 billion to its name, Beijing-based value investor Hillhouse Capital Management (holding steady at No. 3) is the lone representative of mainland China’s fledgling hedge fund sector to make the top ten. Rising one place to No. 4, $3.3 billion currency trader Ortus Capital Management gained nearly $1 billion in assets. Azentus Capital Management, a multistrategy house that almost doubled its assets after a $1 billion launch last April, ties for No. 7 with PAG, a $1.9 billion investor in private equity, real estate and absolute-return strategies.
Moving down the list, multistrategy firm Segantii Capital Management debuts at No. 19, with $551 million. Commodities trader Aisling Analytics slides from No. 11 to No. 21; in a rare bad year, its $1.4 billion in assets shriveled to $531 million.
Asia-based managers raised $4.43 billion in new capital last year, reports AsiaHedge, a division of London-based HedgeFund Intelligence. That was the biggest haul since 2007 and a 15 percent increase over 2010’s total, but inflows were concentrated in two main strategies and relatively few hands.
Multistrategy and macro funds grabbed the bulk of the money, according to AsiaHedge. And more than 40 percent of the total went to Azentus, whose founder is Morgan Sze, onetime Asia head of principal strategies proprietary trading at Goldman Sachs Group. Despite its impressive fundraising, though, Azentus reportedly lost almost 7 percent last year.
“It’s a very tough capital-raising environment, and that’s not just a feature of the Asian hedge fund industry,” says Andrew Gordon, Hong Kong–based head of alternative and broker-dealer services, Asia, for Bank of New York Mellon Corp. “What we saw in Asia last year is that the bigger, more institutionally minded launches did raise capital.”
As the maturing Asian hedge fund industry seeks to bounce back from a difficult year, managers of all stripes must face the challenge of living up to institutional investors’ high infrastructure standards. That means meeting the new norm for the noninvestment side of their business, including high-quality risk management, Gordon contends. “If you’re the classic Asian manager launching with $25 million or less, it’s difficult to afford to build that type of infrastructure,” he says. “But unless you do, you’re not going to attract the institutions.”
Investors looking for Asian hedge funds with scale and top-notch infrastructure have relatively few choices. “There’s not really a large investable universe of hedge funds in Asia, and that’s kind of limiting the growth right now,” Credit Suisse’s Pecot says.
Historically, many Asia-based hedge funds were seeded by European funds of hedge funds, but that business has dried up, says Aisling Keane, Asia-Pacific head of International Fund Services, part of State Street Corp.’s Alternative Investment Solutions group, in Hong Kong. More allocations are coming from Asian sovereign-wealth funds, which sometimes seed their former employees’ hedge fund start-ups, she adds: “We’re also seeing the bigger funds in Asia being seeded by the pensions and insurers in the U.S. But we’re still seeing money coming in from Europe.”
Hong Kong is in no danger of losing its title as Asia’s top hedge fund center. It’s home to 14 of the firms in the Asia Hedge Fund 25, while Singapore has just four, down from six in 2011. As of December almost 20 percent of the world’s Asia-focused hedge funds had their head offices in Hong Kong, compared with 14.6 percent and 5.4 percent for Singapore and Japan, respectively, according to Singapore-based research firm Eurekahedge.
For Tokyo, 2011 was a year of continued decline. Once again, just four Japanese hedge funds make the ranking. Although Sparx Group Co. keeps the No. 2 spot, its assets shrank nearly 20 percent for the 12 months ended March 31, to $6.5 billion. Tokyo-based Bayview Asset Management Co. drops four places to No. 10.
Sparx, a publicly traded firm with subsidiaries in Tokyo, Hong Kong and Seoul, lost money in the past two fiscal years. In an effort to turn things around, CEO Shuhei Abe has forgone its traditional focus on Japanese equities for a pan-Asian strategy. COO Masaki Taniguchi is now based in Hong Kong.
In a promising development, Shanghai is rolling out new regulations that will allow global hedge funds to set up shop there and take domestic assets. But Credit Suisse’s Pecot doesn’t expect rapid change. “Realistically, you’re probably still a good four or five years out before you see any kind of major international opening up of China from a hedge fund perspective,” he says.
Investors spooked about China’s slowdown should remember that the world’s second-largest economy is still going strong. Chinese outbound deals were a little slower in the second quarter, notes Nick Taylor, founder and CIO of Hong Kong–based Senrigan Capital Management, an event-driven shop that stays at No. 15 despite 2011 losses that trimmed its assets to $885 million as of April 2. “We believe this is largely political, and that the autumn leadership change will be the catalyst for further large outbound transactions,” Taylor says. “Deals emanating from China are as much about politics as they are economics.”
Francis Tjia, co-founder and CEO of Hong Kong–based fixed-income and credit manager Income Partners Asset Management (H.K.), up five places to No. 13, blames worldwide volatility on a lack of clarity in Europe. “Until that is settled I don’t think investors are ready to make big allocations globally, whether it’s on a geographic basis or a strategy basis,” he says.
Looking ahead, Tjia thinks Asia is well positioned for growth because its already strong sovereign-credit ratings are still improving. Its banks are strong too — and they already had their crisis, back in the late 1990s. “Europe needs to get its act together,” Tjia says. “Beyond that we’re kind of done with the systemic risk, and you just look at fundamentals and economics. And then our bet is really on Asia.” • •