In 1998, as much of Asia teetered on economic and financial collapse, Robert Appleby, a managing director at French bank Crédit Agricole Indosuez, decided to join a partner launching a hedge fund in Hong Kong. To many of his friends and colleagues, it seemed like a crazy move. Markets in Hong Kong, Seoul and Jakarta had tanked, currencies such as the Thai baht and the Filipino peso were in free fall, and ratings on Asian countries’ debt were being downgraded to junk bond status.
“Nothing on that scale had ever happened before, and that was the time we set up our business,” recalls Appleby, who is chief investment officer of that firm, Asia Debt Management Hong Kong, which has since become one of the region’s biggest hedge funds, with more than $1.4 billion invested largely in distressed debt. “Many said it was foolhardy. I tend to agree, but in retrospect that was the right time to get involved in a market no one had any clue about.”
Less than a decade later, Asia’s stunning recovery has attracted enormous amounts of capital and spurred a historic shift in the hedge fund industry. Since 2002 the number of Asian hedge funds has quadrupled, to more than 700, and the assets they manage have surged nearly tenfold, to about $120 billion, according to information compiled from two Singapore-based Asian hedge fund manager research and consulting firms, Eurekahedge and GFIA.
And whereas London and New York were once the principal centers for hedge funds managing capital flowing toward Asia, an arrangement that required managers to work odd hours with night trading desks, many of those firms have opened offices in Asia. At the same time, local hedge fund operations in the East are starting to take hold, led by a generation of Western-trained managers who have returned home to tap the region’s unfolding opportunities.
“Asia is the fastest-growing component of the hedge fund universe,” says Kier Boley, who is based in London as the investment manager of emerging-markets and Asian multimanager investments for GAM, one of the bigger fund-
of-hedge-fund investors in Asia, with $1.3 billion staked in the region.
For investors like Boley, finding local Asian hedge fund talent can be a huge challenge. Unlike many of the biggest hedge funds in Europe and the U.S., which are starting to open up as they try to attract assets from pension sponsors and other institutions, most Asia-based firms still keep a decidedly low profile. That’s why this year Institutional Investor’s sister publication, Alpha, decided to go out and find the biggest hedge funds in Asia. As part of our research, we separately contacted more than 250 hedge fund firms, asking them for detailed information about their strategies, assets and performance as of December 31, 2005.
The result is the Asia Hedge Fund 25, our ranking of the 25 biggest firms headquartered in Asia. Collectively, these firms managed, at year-end 2005, $22.6 billion in single-manager hedge funds. Heading the list is Tokyo-based Sparx Asset Management Co., which had $5.2 billion in hedge fund assets. In June, Sparx bought the No. 2 player, Hong Kong’s PMA Capital Management, which had more than $2 billion in hedge funds. Rounding out the Asia Hedge Fund 25 top five are Appleby’s ADM, Hong Kong–based Ward Ferry Management ($1.4 billion) and Penta Investment Advisers ($925 million).
It’s easy to see why investors and managers have poured into the region. In 2005 the MSCI Far East index soared 22.4 percent, compared with a gain of 6.5 percent for the MSCI Europe index and a total return of only 4.9 percent for the Standard & Poor’s 500 index.
Hedge fund returns reflect the gains in Asian markets. According to Christopher Lennon, vice president of research at MSCI Barra in New York, annualized returns during the past three years for the MSCI hedge fund Japan index were 12.6 percent as of May 31; those for its index covering the rest of the Asia-Pacific region were 13.2 percent. In comparison, returns for hedge funds in Europe and North America for the same period were 7.8 and 9.5 percent, respectively.
“In 1997, when we first launched our long-short fund, there were only three long-short hedge funds investing in the Japanese market,” says Shuhei Abe, who founded Sparx in 1989. “Now there must be 200 or 300 long-short funds.”
Western firms that were once content to operate out of home offices close to their sources of capital have opened bases in the East to gain better access to information about local companies and managers. A year ago Switzerland-based fund-of-hedge-funds firm Gottex Fund Management shifted its headquarters for Asia research from New York to Hong Kong. Since then it has increased its allocation to Asia and added five times as many Asian fund managers. “We’d miss out on over two thirds of the managers if we didn’t have offices located here,” says Peter Bennett, the Hong Kong–based head of Asia for Gottex, which has 13 percent of its $5 billion in assets under management invested in the region.
Adds Stephen Diggle, co-founder of Singapore-based Artradis Fund Management (No. 21 on our list, with $425 million in assets): “The industry has overwhelmingly centered in Asia, both by assets and numbers. The final piece of the transition is that the giant global hedge funds now almost all have offices in Asia, so the era of the night trading desk is over.”
In some ways, the Asian crisis of the late 1990s set the stage for today’s Asian hedge fund industry. When Japan was soaring in the late 1980s, investors in Asia had little need for hedging strategies, as equity investments generated healthy profits. “Ten years ago people were interested in long-only strategies,” says George Long, CIO and chairman of LIM Advisors in Hong Kong, whose firm is tied for No. 13, with $600 million in hedge funds. “And then you had the Asian crisis, and many people lost a lot of money, so people became a little more aware of hedging strategies.”
During the past few years, Asian countries have been increasingly accommodating to hedge funds. Singapore has become one of the most popular destinations for hedge fund start-ups by offering incentives such as tax exemptions on capital gains and the income that financial service companies earn on behalf of clients. Meanwhile, expanding markets and new regulations in other Asian countries are making it possible to sell short, engage in arbitrage and execute other strategies that were unheard of in the region a decade ago.
“It used to be impossible to borrow and lend stock in Taiwan,” says Long, whose firm has opened offices in Tokyo and Beijing. “That’s now possible, and there is an active stock-lending market in Taiwan.” Long also is encouraged by the growth in the availability of derivatives, especially exchange-traded futures. “Five to ten years ago, there were futures markets in only a couple of Asian countries,” he says. “Now most countries have them.”
Asian hedge funds are getting a boost from an increase in interest from U.S. investors. Less than two years ago, not even 10 percent of the assets of Singapore-based Tantallon Capital came from the U.S. Today that figure is close to 40 percent, says Peter Douglas, a principal in consulting firm GFIA and a nonexecutive director at Tantallon, No. 16 on our list, with $559 million in hedge funds. Douglas estimates that by the end of this year, 60 to 65 percent of Tantallon’s assets will be from the U.S.
Regardless of the source of the assets, investing in Asian hedge funds carries risks. Chief among them is the predominance of long-short strategies. Roughly 70 percent of Asian hedge fund assets are invested in long-short funds. Managers say that other strategies have emerged, but the large percentage of long-short strategies creates a higher correlation between fund performance and local equity markets.
This year could prove the test for many Asian hedge funds. Stock market indexes in Japan, Seoul, Hong Kong and other Asian financial centers tumbled in May before regaining some ground. As of the end of June, the MSCI Far East index was up just 1.8 percent for the year, and the MSCI Pacific index had risen 2.7 percent. Amid the volatility, some managers say they are sensing a cautionary mood among investors.
Managers also note the difficulty in covering Asia. Though investors tend to think of the Asia-Pacific region as a whole, it remains a fragmented market consisting of many countries whose languages, currencies, laws, regulations and investment attitudes are less unified than those in the Europe and the U.S., creating a labyrinth of barriers for effective hedging.
Despite this year’s turmoil, most investors are optimistic about the long-term prospects for Asian markets. They cite, among other positive developments, the end to years of deflation in Japan, as well as India’s success in taming inflation. “There’s a very strong case for Asian economies,” says Gottex’s Bennett. “Asia, including Japan, already represents 35 percent of global GDP, and over time it is likely to represent more than 50 percent. Asian markets are less sophisticated, and they are going to broaden and deepen over time, and that gives rise to opportunities.”
Investors such as Bennett believe that hedge fund assets will continue to flow into the region, driven by several factors, including the growing number of Asian consumers, which will lessen the dependency of local companies on foreign exports; regulatory changes, which will make hedge funds easier to operate throughout the region; and the expansion of Asian capital markets, which will give managers more ways to invest.
“The Asian hedge fund industry has proven we can make good money in a strong market,” says Artradis co-founder Diggle. “What we haven’t proven is that we can make money in a bear market. That’s the challenge.”
