50 South Capital, Northern Trust’s alternative investment subsidiary, is eyeing more Asian and credit exposure for its hedge fund portfolios, and plans to remain focused on emerging markets for its macro strategy for the rest of 2016.
The firm is starting due diligence on three Asia-based hedge fund managers – one credit manager and two new long/short equity launches, but declined to identify them. These are strategies that have been attracting more attention recently, said Tristan Thomas, Chicago-based director of portfolio strategy for the hedge fund investment team.
50 South Capital plans to add two to three new Asia-based hedge fund managers this year if they meet its criteria, he noted. Every year the firm meets around 500 managers globally and adds four to six of them to its platform, so Asia managers look set to represent half of its new funds this year.
50 South currently invests with three managers focused on emerging markets, and all three are either headquartered or have offices in Asia.
However, the firm does not yet have Chinese fund managers in its portfolio, because they tend to run relatively long-biased strategies, because it is difficult to short in China, Thomas said.
Last week he visited Hong Kong and Tokyo to meet endowments, foundations and pension funds. Investors in Hong Kong, Korea, Japan and Singapore in particular have become more active in hedge funds over the past two years, Thomas said, but did not provide specific facts or figures to support this.
In fact, the first half of the year saw net outflows from hedge funds globally of $23.3 billion, according to Hedge Fund Research Inc (HFRI).
The flows reflect disappointing performance this year. The HFRI World Index gained 2.87% this year as of August 5, underperforming the MSCI World Index return of 3.24% in that period. The HFRI Asia index rose 1.85% year-to-date in the same time frame, again below the MSCI AC Asia Index return of 2.19%.
Nevertheless, there are a lot of funds providing solid returns that investors are happy with, said Thomas.
Looking to credit strategies
Asked which hedge strategies 50 South is favouring, he said it was shifting away from event-driven equity strategies, as it sees the current M&A cycle entering a late stage.
Instead it is focusing more on credit funds. Credit markets are not very liquid, he noted, which means they can offer interesting opportunities in the form of short-term price dislocations driven by movements of blocks of bonds. Nimble, smaller managers can take advantage of such market moves to generate decent returns, said Thomas.
Meanwhile, most of 50 South’s macro exposure is emerging markets-focused – primarily in FX and rates, with some equity exposure – across Asia and Latin America. “We’ll stay with the EM-focused strategy for the rest of the year,” Thomas said, with the low-interest-rate environment expected to prevail for some time.
This follows 50 South’s move two years ago to shift its macro book away from traditional G3-focused macro managers and towards EM-focused managers, taking the view that the low-rate environment would continue.
Northern Trust combined its hedge funds and private equity divisions in 2011 and further consolidated them into 50 South Capital in June last year. It managed about $5 billion as of June 30, 2016, with $2.7 billion in hedge funds.