Funds of hedge funds pick feline-friendly investments

Which strategies do fund-of-hedge-fund managers fancy for the year of the tiger?

AsianInvestor last week hosted a roundtable for a quartet of distinguished Hong Kong-based fund-of-hedge-fund managers.

They were chatting about operational due diligence, hedge-fund con men, their advice for people wanting to start a new fund and the future of the industry. As a taster, here are their answers to one question. Answers to all the other questions will appear in the next issue of the magazine.

We asked them which hedge fund strategies interest them most for 2010.

Brenda Tse, managing director at Permal: We like long/short equity, because we think 2010 is going to be fundamentally driven. We also like fixed income and event-driven. We prefer discretionary macro strategies, though we'll reserve judgment over macro-trend followers over the next six months to see which way the market goes after this transition. Fourthly, we like natural resources long/short.

Deng Xiaoli, vice-president, alternative investment partners at Morgan Stanley: The beta play is gone! While we expect macro factors to remain important, we believe other factors will increasingly drive asset prices. A fall in asset correlations should be good for fundamentally driven security-selection strategies. We are interested in macro strategies because of macro uncertainty and levels of volatility. Emerging markets are attractive for both macro managers who can exploit the differences between countries and also long/short managers with an active approach to exposure management. Finally, we believe that distressed opportunities are still in the early stages and offer good risk-reward for the next few years.

Denise Hu, chief investment director at Archer Asia: In Asia, we think there are good opportunities this year for skilful stock-pickers who can manage both the long and short side and also for more catalyst-driven strategies. But our investors aren't paying us to bet on the markets, so we don't take the approach of making big strategy calls. Our philosophy is to create a diversified portfolio with 'best of breed' managers across various strategies, including equity long/short, event-driven, credit and macro.

Harold Yoon, chief investment officer at Sail Advisors: The macro view is an important factor, because in my view we are at a tilting point whether the recovery will continue once the stimulus is withdrawn by governments. We don't want to be with funds that are exposed to excessive directional risk as our edge is not in calling the markets.

So my pick would be for alpha-orientated long/short managers. We tend to go with lower-exposure US managers, as Asia is so directional and it's hard to assess alpha versus beta. In the US, the long/short space is focused on small- and mid-caps, where you can gain a research edge and there is more liquidity than in Europe and Asia for small- and mid-caps.

In other areas, I favour traditional distressed managers that can benefit if there are increased bankruptcies and restructurings in a bear-market scenario and that can also profit from refinancings and corporate events in a bull-market scenario.

Denise Hu                                        Brenda Tse

Xiaoli Deng                                       Harold Yoon

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