Asian markets have moved forward since the crisis, but the knock-on effect from events in the West this year will likely lead to volatility, says Michael Hintze, the founder and chief executive of $11.8 billion hedge fund firm CQS.
The European economy appears to be slowing this year and Asia will not be immune to market swings overseas, notes Hintze, who is based in CQS’s London headquarters.
“Asia should be better positioned to deal with slowdowns in the market,” he says. “Public debt in Asia ex-Japan’s developed markets has been coming down, whilst it’s been going up dramatically in the [West].”
Since 2007, CQS has been managing a multi-strategy Asia Fund out of its Hong Kong office which has an emphasis on convertible arbitrage and credit, with sub-strategies that include long/short equity and equity index volatility trading. While Asia’s growth provides hedge funds with opportunities to make performance gains, the firm will continue to take a cautious view.
“I’m very happy to take directional positions, says Hintze. “I’m very constructive on the Asian market but, that said, it doesn’t look risk-free to say the least. The real problem we’ve got here is a volatility problem.”
Asia’s significance in the global marketplace is reflected in the fact that several of CQS's funds have positions in the region. “When we look at our overall exposure to Asia, it’s not just in the Asia Fund. It’s an important part of our overall footprint and where we are [as a firm],” says Hintze, “which is another reason why we need to think clearly about where Asia is going.”
While the region’s markets have matured over the years, a remaining challenge in running an Asian fixed-income hedge fund is that hedging is not straightforward, says Hintze. “Because of the inability to hedge specific names, the marketplace has adjusted. On a risk-reward basis it is quite attractive, but the question is, where you have the risk, is the reward appropriately sized? I think it is.”
CQS has adjusted over the years by minimising its exposure to privately placed securities in Asia. “We were never deep in private placements and are now further away from them,” says Hintze. “We [trade] liquid names which are in the public domain. We also have put on balancing trades. It’s hard to call them hedges, but they do hedge.”
Hintze, who also serves as chief investment officer for CQS and manages the portfolio for the firm’s multi-strategy Directional Opportunities Fund, is keeping an eye out for several possible black swan events this year. Social instability in Iran and Nigeria may affect oil prices and supply, while the euro sovereign debt problems will persist, he says.
“The European Union government has more tools, such as the long-term refinancing operations, to deal with the banking system, but as to whether it deals with the sovereign system is a different matter,” says Hintze.