The Asian Debt Fund, a Singapore-based hedge fund boutique, is targeting the launch of an Asia ex-Japan high yield hedge fund for 1 October. Fund manager, Moe Ibrahim, says that the new fund will have a capacity of around $500 million and expects the fund to launch with at least $10 million under management.

The new fund is The Asian Debt Fund's second launch. The firm launched its distressed debt fund in January 2004 and has since been one of Asia's top performing hedge funds returning 26.2% net of fees for 2004. The distressed fund currently stands at $165 million and is soft closed.

Ibrahim says that while most distressed funds hold high yield investments in a combined portfolio, he will manage high yield investments in a separate fund to provide investors with enhanced transparency and flexibility.

The new high yield fund will look to focus on the bank loan market, which makes up nearly half of high yield debt opportunities in Asia.

"Traditional high yield funds tend to stick to the bond market and avoid the bank loan markets where settling trades can take time and be complicated," notes Ibrahim. "Relationships are key to participating in the bank loan market, which is dominated by domestic and foreign banks. We are well positioned to take advantage of this as we are familiar with the players since the relationships we develop from the distressed debt approach are key to sourcing both sellers and buyers of bank loans. Our edge is that we understand how to settle bank loans, which is a normal part of our business."

He points out that bank loans have unique features that make them advantageous investments. For instance, they typically pay interest as a spread over LIBOR and reset their coupon every quarter, effectively removing interest rate risk. Since the coupon's get reset every quarter, Ibrahim says that loans do not trade above par when interest rates fall, so they tend to be much less volatile investments compared to high yield bonds. Moreover, unlike most high yield bonds, bank loans have features that allow prepayment without penalty. Ibrahim says the average duration for a bank loan is about 18 months.

While the distressed fund takes a very opportunity specific approach, the high yield fund will involve wider credit and relative value analysis to find companies with promising prospects. "This strategy is more dynamic. It cannot be looked at in a vacuum, we will pay close attention to the universe and the new issues coming on the market," says Ibrahim. "The Asian high yield bank debt market has been growing rapidly with a number of newer companies tapping it as a source for growth capital. In addition there are also companies who are emerging from debt restructurings but still suffer from taint of bankruptcy and need to raise capital on high yield markets in order to establish their credibility."

The high yield fund will go both long and short and in addition to high yield investments will manage risk by hedging through investments in treasuries, equities, CDS's.

The fund will be looking to use leverage of up to 200%. Merrill Lynch has been appointed prime broker.

The Asian Debt Fund is sponsored by Finansa, a Bangkok-based investment bank, and JAIC (Japan Asia Investment Corporation), a Tokyo-based venture capital firm.