A golden age for hedge funds beckons
Peter Douglas of GFIA/Wittenham shares his thoughts on the shenanigans in the alternatives world during the past year and says Asia is entering a golden age for hedge fund returns.
Peter Douglas is one of the movers and shakers in AsiaÆs alternatives world. He is the principal and founder of GFIA, the longest established hedge and absolute return consultant in Asia.
GFIA, which was established in Singapore in 1998, researches and allocates capital to funds investing in Asia and emerging markets globally. Using their research, the firm advises professional investors and manages the Wittenham family of funds of funds.
Douglas is also the Asia-Pacific representative director of the Alternative Investment Management Association (AIMA), and the Asia-based director of the Chartered Alternative Investment Management Association.
Does Bernie Madoff's scam sound the death knell for hedge fund investing? If investors are so stupid as to fall for something like this, why should people not just assume itÆs a case of 'the emperor's new clothes' when it comes to placing money with them in future?
It sounds the death knell for scalability. Once an allocator gets so large that they have to take reputable capacity without being able to get under the managerÆs skin and understand whatÆs going on, you end up with Madoff-type risk û and thatÆs what some of the very large funds of funds have to do. IÆm sure youÆve also come across investors, private investors in particular, whose investment strategy is to put money exclusively with hard-to-access managers, invariably without doing detailed due diligence directly.
If a fund of funds was invested in Madoff, will it make it difficult for that fund to represent itself as competent in the future?
We have always said that lack of, or deterioration of, information flow, is the most powerful red flag. For example we were asked by a client to review Charles SchmittÆs fund of funds as a potential investment, about a year before it blew up. Although we didnÆt spot a fraud, we couldnÆt get answers to what we considered were some fairly elementary questions, and told our client to walk away and look for a comparable proposition where we could get the information we expected. While I donÆt know the detail of the Madoff scam, my guess is that itÆs not a dissimilar scenario. There will always be some investors who do the work, and some that donÆt. Most of the time it makes little difference. Occasionally it makes a career-threatening difference.
How have your funds done this year? Are you happy with performance in 2008?
Wittenham Asia Core (WAC) is down 15.3% compared with -22.7% for the peer group, and -47.6% for the equity markets, through to the end of November. Wittenham Mena Plus is down -26.2% compared with -32.1% for the peer group.
WeÆre particularly proud of the WAC fundÆs performance, which was top decile in 2007, and is at least top quartile in 2008. ItÆs difficult to be more precise as a number of competitors have stopped reporting, with a correlation which has made it an effective portfolio diversifier.
How likely is it that the big American hedge funds (naming no names) are no longer going to be with us in one yearÆs time?
Unlikely. WeÆve seen this time and time again in Asia. The large global financial firms see the opportunity in Asia midway through the cycle, go operational late in the cycle, then are surprised by AsiaÆs famously fickle liquidity, and exit soon after the cycle peaks. Granted, the cycle this time was particularly acute and the pullback vicious. We saw this with the securities firms, we saw this with the investment banks, and now weÆve seen it with hedge funds.
The good news is that they leave behind them a new crop of skilled people whose talents will be well used elsewhere, possibly in their own firms, and wide spreads and inefficient prices that will increase returns for the remaining indigenous players.
If someone wanted to set up a hedge fund now, what advice would you give?
Do it! Do it now! WeÆre entering a golden age for hedge fund returns, with alpha-seeking capital having evaporated during 2008. So long as you have $10 million of stable capital to start, youÆll make a good living, assuming you know what youÆre doing, from the performance fee over the next few years. In a recession your business costs will be low and youÆll find plenty of talent available. It wonÆt matter that you canÆt raise assets for a while because, with a few years of 20% plus per annum performance, investors will come to you eventually. Consider a seeder/incubator, but choose wisely, based on their infrastructure and professional reputation, and donÆt feel you have to give too much away.
GFIA, which was established in Singapore in 1998, researches and allocates capital to funds investing in Asia and emerging markets globally. Using their research, the firm advises professional investors and manages the Wittenham family of funds of funds.
Douglas is also the Asia-Pacific representative director of the Alternative Investment Management Association (AIMA), and the Asia-based director of the Chartered Alternative Investment Management Association.
Does Bernie Madoff's scam sound the death knell for hedge fund investing? If investors are so stupid as to fall for something like this, why should people not just assume itÆs a case of 'the emperor's new clothes' when it comes to placing money with them in future?
It sounds the death knell for scalability. Once an allocator gets so large that they have to take reputable capacity without being able to get under the managerÆs skin and understand whatÆs going on, you end up with Madoff-type risk û and thatÆs what some of the very large funds of funds have to do. IÆm sure youÆve also come across investors, private investors in particular, whose investment strategy is to put money exclusively with hard-to-access managers, invariably without doing detailed due diligence directly.
If a fund of funds was invested in Madoff, will it make it difficult for that fund to represent itself as competent in the future?
We have always said that lack of, or deterioration of, information flow, is the most powerful red flag. For example we were asked by a client to review Charles SchmittÆs fund of funds as a potential investment, about a year before it blew up. Although we didnÆt spot a fraud, we couldnÆt get answers to what we considered were some fairly elementary questions, and told our client to walk away and look for a comparable proposition where we could get the information we expected. While I donÆt know the detail of the Madoff scam, my guess is that itÆs not a dissimilar scenario. There will always be some investors who do the work, and some that donÆt. Most of the time it makes little difference. Occasionally it makes a career-threatening difference.
How have your funds done this year? Are you happy with performance in 2008?
Wittenham Asia Core (WAC) is down 15.3% compared with -22.7% for the peer group, and -47.6% for the equity markets, through to the end of November. Wittenham Mena Plus is down -26.2% compared with -32.1% for the peer group.
WeÆre particularly proud of the WAC fundÆs performance, which was top decile in 2007, and is at least top quartile in 2008. ItÆs difficult to be more precise as a number of competitors have stopped reporting, with a correlation which has made it an effective portfolio diversifier.
How likely is it that the big American hedge funds (naming no names) are no longer going to be with us in one yearÆs time?
Unlikely. WeÆve seen this time and time again in Asia. The large global financial firms see the opportunity in Asia midway through the cycle, go operational late in the cycle, then are surprised by AsiaÆs famously fickle liquidity, and exit soon after the cycle peaks. Granted, the cycle this time was particularly acute and the pullback vicious. We saw this with the securities firms, we saw this with the investment banks, and now weÆve seen it with hedge funds.
The good news is that they leave behind them a new crop of skilled people whose talents will be well used elsewhere, possibly in their own firms, and wide spreads and inefficient prices that will increase returns for the remaining indigenous players.
If someone wanted to set up a hedge fund now, what advice would you give?
Do it! Do it now! WeÆre entering a golden age for hedge fund returns, with alpha-seeking capital having evaporated during 2008. So long as you have $10 million of stable capital to start, youÆll make a good living, assuming you know what youÆre doing, from the performance fee over the next few years. In a recession your business costs will be low and youÆll find plenty of talent available. It wonÆt matter that you canÆt raise assets for a while because, with a few years of 20% plus per annum performance, investors will come to you eventually. Consider a seeder/incubator, but choose wisely, based on their infrastructure and professional reputation, and donÆt feel you have to give too much away.
¬ Haymarket Media Limited. All rights reserved.