Asia Hedge Funds Survive in Year of Pain for Global Industry

By Klaus Wille

In a punishing year for global hedge funds, those investing in Asia are the survivors.
Stung by poor returns and large redemptions, 889 hedge funds worldwide shut in the first 11 months of the year, above the annual average of 810 in the five years since the global financial crisis of 2008, according to figures from research firm Eurekahedge Pte. In contrast, 56 Asia-focused funds had closed by the end of November, less than half the average 135 closures in the previous five years.
“Asia’s hedge funds, on average, are more resilient than those in Europe and the U.S.,” said Brian Thung, who advises hedge funds as a Singapore-based partner at Ernst & Young Global Ltd. “In addition to better performance, they have a lower cost base, which helps
them survive with lower assets under management.”
Bolstered by rallies in equity markets such as India and China, Asian funds are set to outperform their peers in Europe and the U.S. for a third year, even as their inflows slowed. Funds investing in the region, which on average are two-thirds the size of their U.S. peers, have returned 6.1 percent this year to the end of November, compared with a 5.7 percent return for North America and 1.2 percent for Europe, according to data from Singapore-based Eurekahedge.
Running a hedge fund in the Asia-Pacific region can be as much as 42 percent cheaper than in the U.S. and Europe, helped by lower salary costs, according to a survey by Citigroup Inc. (C) published in November 2013.

Smaller Funds

Small and mid-sized funds in Asia have received a greater proportion of reduced inflows compared with similar-size funds elsewhere, which has helped the region’s many minnows stay alive, according to Mohammad Hassan, a Singapore-based analyst at Eurekahedge.
Hedge funds investing in Asia, which may be based outside the region, on average have $223 million of assets under management, compared with $357 million in North America and $294 million in Europe, Eurekahedge said.
In Asia, funds with assets of $500 million or less had net inflows amounting to 8 percent of the region’s total flows since January 2013, according to Eurekahedge. By comparison, investors withdrew money from same-sized funds focusing on other regions, with outflows making up 9 percent of total flows, according to the data provider.
Globally, smaller funds have suffered as institutional investors have focused on the bigger managers, such as Citadel LLC and Millenium Management LLC.

Sticky Allocations

In the U.S., the $37 billion Brevan Howard Asset Management LLP decided to shut its $630 million commodity fund after it had tumbled 4.3 percent this year through the end of October, according to a person with knowledge of the firm. Woodbine Capital Advisors LP closed down after assets dwindled, while Anderson Global Macro LLC and Kingsguard Advisors LP both shut after less than three years in business.
Allocations in Asia are “stickier” and less likely to be withdrawn in times of trouble, said James Luong, the Singapore-based manager of the Thetis Macro Opportunities Fund, which started this year with assets of less than $20 million.
That’s because Asia-mandated funds get more money from the region’s wealthy individuals and family offices, and less from institutional investors than funds investing elsewhere, Luong said. Many of those Asian investors “were entrepreneurs at one point in time. So they are more comfortable with volatility and risk taking,” he said.

Underweight Asia

Among closures in Asia this year, PCA Investments, based in Hong Kong, shut a multistrategy hedge fund after China’s sovereign wealth fund, its only major outside investor, indicated it would pull its money because of a strategy change, two people familiar with the matter said in January.
Despite those shutting down, Asia’s fund industry is more “robust” because investors’ allocations have been less volatile, said Gordon Russell, Singapore-based global head of risk at hedge-fund service provider Broadridge Financial Solutions Inc. (BR)
“Asia has been underweight by global allocators for years,” Russell said. “So when institutional investors and funds-of-funds are looking to pull their money, they are going to pull less from Asia because they are underexposed already.”

Inflows Slow

Russell also said that Asia’s investors have borrowed less than those elsewhere and consequently are under less pressure to withdraw money when their investments decline in value.
“In Asia, there is less hot money than in Europe and the U.S.,” he said. “It’s a cultural thing. Asia is about safe money; Americans and Europeans are big borrowers.”
Asia, especially emerging markets in the region, makes for good diversification in investors’ portfolios at a time when Europe is struggling to recover and the U.S. is just starting to pick up, Eurekahedge’s Hassan said.
“That means investors are less inclined to withdraw money from the region, which stabilizes Asia’s hedge-fund industry,” he said.
Net flows into funds investing in North America were at $28.6 billion this year through October, according to Eurekahedge. That’s less than half the $63.2 billion collected last year.
Inflows into Asia fell to $5.3 billion this year through October, from $11 billion last year, the data show.
Gains in Asian stock markets this year have helped equity long-short funds, the dominant strategy among hedge funds focused on the region. India’s S&P BSE Sensex benchmark index has gained 36 percent and China’s CSI 300 Index has advanced 21 percent to the end of November, outperforming the 12 percent gain of the Standard & Poor’s 500 Index and the 5.8 percent advance of the Stoxx Europe 600 Index over the period.
More fund managers in Asia start with their own money, giving them more of an incentive to perform and stay in business, said Thung at Ernst & Young.
“There is a deep keenness of managers here who want to try to continue as long as they can, even by funding their own operations themselves,” he said.
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