Asia-focused hedge funds perform better if they are run from within the region, a recent study from Singapore-based research firm GFIA shows, and Hong Kong-based fund of hedge funds 3A Asia says the findings are reinforced by its own experience.
The GFIA research results suggest that major funds that scaled down Asian operations during the credit crunch -- such as the Children's Investment Fund and Cerberus Capital Management -- may rue the decision, and that investors should favour funds that have headquarters in Asia.
GFIA concludes that Asia-based funds consistently do better than their peers based elsewhere in the world, in a white paper titled 'Asian hedge funds -- best run from inside or outside their markets?'
The findings show the power base of the Asian hedge-fund world has left cities such as New York and London, moving to the key financial bases of North and Southeast Asia. "While even 10 years ago, the centre of the Asian hedge-fund industry was London, now the centre is clearly the Hong Kong/Singapore nexus," says the paper.
GFIA, run by Peter Douglas, is not a disinterested party-- its business model focuses on indigenous Asian managers. Its sister company, Wittenham Investment Management, runs an Asia-focused fund of funds, the Wittenham Asia Core Fund, as well as a fund focused on the Middle East, emerging Europe and Africa.
Still, after the rollercoaster ride of the global financial crisis and the strong rally that followed quickly afterwards, GFIA decided to revisit the issue of whether Asia-based managers held any advantage in running their funds. It looked at 668 funds that reported results to AsiaHedge between January 2005 and May 2010.
It has previously studied the issue of whether a hedge fund's base matters. But the post-crisis results strengthened the point that having an Asian headquarters leads to better results.
"Each time we run this analysis, our conviction increases, and this time was no exception," GFIA says. The research company came to the same conclusion of outperformance in five hedge-fund strategies: Asian equity ex-Japan, Asian equity including Japan, Chinese equity, Japanese equity and macro/multi-strategy.
The conclusions make sense to Brian MacDougall, executive director of 3A Asia in Hong Kong.
"Markets are driven on sentiment, and it is a lot easier to figure out the sentiment by going out and seeing how hard it is to get a seat at lunch time, or how many taxis are driving around empty," he explains. "I wouldn't want to start a fund based on taxis and restaurants, but they are indicators that you don't necessarily see in New York or London. People really can time the markets out here."
The outperformance comes at a cost, however. Asia-based, Asia-focused managers also exhibit higher volatility. The exception is Japan-based managers in Asia, which posted better numbers than Japan funds outside Asia, with lower volatility at the same time.
Kelvin Yu, portfolio manager at 3A Asia, says that when it comes to Japan-focused funds, managers who are not Japanese nationals perform better. "A lot of Japanese managers think very similarly" and follow the same value-orientated, bottom-up investment strategy, he says. "I think they are less connected to the world."
By contrast, non-Japanese nationals who run Japan-focused funds tend to incorporate macro data and have a broader web of connections around the world that help them put the country's economics and companies into better perspective. That leads to better performance, Yu says.
In general, he feels it is most important to have a strong research presence in Asia. A fund can then function with a portfolio manager outside the region.
He says locally based managers in China, Indonesia, Thailand and Vietnam definitely perform much better than their peers outside the region, because the markets are not transparent and have a low correlation to other parts of the world.
"If you look at Southeast Asia, there's no doubt the managers located in this region perform better than those based in London or New York," he says. "Quite a lot of good information you get may not be from the meeting [with a company] but from hanging out afterwards with the management or with your peers."
Meanwhile, GFIA found non-Asia-based managers did have an advantage over their Asia-based peers in terms of the amount of time it took them to recover from the financial crisis. Perhaps because those funds are not as volatile, non-Asia-based funds following Asia ex-Japan and Chinese-equity strategies have already exceeded their pre-crisis peak. Of the five strategies, only Asia-based macro or multi-strategy funds are back above their previous peak.
Although emerging markets are now some of the top performers globally, Asian hedge-fund managers have suffered wholesale withdrawals and a whittling of their ranks during and after the crisis.
According to US-based firm Hedge Fund Research, Asia-focused funds now have assets of just over $77 billion, down from a peak of $111 billion at the end of 2007. The number of Asia-focused funds fell slightly to 1,036 in the first quarter and they now manage just 4.7% of the overall $1.65 trillion in hedge-fund assets.