Genesis of a new fund of hedge funds

Genesis Capital Management, a Hong Kong-based global fund of hedge funds manager, is preparing to launch an Asia-focused product.

"The Asian hedge fund industry is set for a period of sustained growth," says Christopher Aiello, managing director of Genesis. "Currently, Asian hedge funds make up only 6% of the global universe, so there's plenty of room for expansion. This warrants the creation of a separate product. The capacity to operate Asian hedge fund strategies is improving as the markets deregulate short selling restrictions and increase the availability of derivative instruments. This is being met by significant interest from Europe and the US in Asian hedge fund strategies."

Aiello says he is currently tracking a short list of Asia hedge funds. Aiello says the product will be launched in the second half of this year, or once sufficient assets are committed for a launch.

"For any investor, the main issue with investing in Asia is the maturity of the industry. Initially I did a database search for funds with a three year track record and over $50 million under management and I came up with only six names."

Aiello says he will build a portfolio of about 10 Asian managers that show consistent low volatility returns, although he expects the Asian product to have a higher risk return profile than the flagship Global Capital Appreciation Fund, which has so far enjoyed a 15.6% annualised return with a 2.5% standard deviation.

Aiello founded Genesis in May 2001, launching a global fund of hedge fund product seeded by a Japanese corporate investor. Six months ago the fund opened up to outside investors.

"Since then our clients have grown from one to 20," says Aiello. "Most of these are high net worth individuals and family offices."

The fund currently has $10 million in assets under management.

"We are poised for AUM growth this year as we are hitting our third anniversary, which is a track record milestone," he comments. "We've been careful to build a solid foundation and risk management process before aggressively growing assets. Our next target is to get up to $35-$40 million over next 12 months."

Aiello says good performance depends on his decision to run a concentrated portfolio (currently there are only 10 funds), as well as careful manager selection and due diligence.

"We also develop our own macro view through a proprietary quantitative model, which analyses 40 different factors including interest rates, equity and bond indices, currencies and commodities, valuation levels and investor sentiment," he explains.

Last month, Genesis added its first Asian hedge fund, an equity long/short Asia ex-Japan fund, to its global portfolio.

"Over the last 18 months Asia has been a one-way bet, and our European and US based investors have been asking us to add an Asian manager to our portfolio," he notes

However, April was a difficult month for Asian hedge funds, and Aiello's global fund of funds was down 0.6% for the month, largely due to the poor performance of the new Asian fund.

"The addition of an Asian fund has added to the volatility of our global portfolio. The Asian manager did not short as much as we expected him to. But we still believe in the manager, he has 20 years experience in the Asian markets and has rigorous stock selection skills and strict risk discipline," Aiello concludes.

He is also actively monitoring an Asian distressed debt fund and a Japanese statistical arbitrage fund, whose performances are less correlated to the markets.

"Volatility is going to be much more prevalent theme this year. The yield curve has shifted up in the US and China is overheating. Everyone says that Asia has decoupled from the US but in more volatile circumstances correlations tend to move towards one," says Aiello.

Aiello also has strong contrarian views on Japan.

"Although the Japan recovery story is being promoted by investment banks I am sceptical. My seed client has been in Japan for over 400 years and I have regular conversations with Japanese businessmen. Bad loans are still plaguing the banking system and the Nikkei has yet to hold and close over 12,000."

Aiello says his vision as a boutique alternative investment asset manager is to develop four primary products with different risk return profiles.

In addition to the flagship fund, which has a medium risk profile with consistent returns and the higher risk return Asian fund, Aiello hopes to add a higher risk-return global opportunities fund and an Islamic Sharia compliant fund.

"That would round out the product suite that we are able to offer our investors," concludes Aiello.