Glenwood expects new hedge-fund opportunities in Asia

The credit crisis has created new opportunities for hedge-fund-of-funds managers, as the Asian universe diversifies; but will long/short managers in Asia actually short?
Asia-focused strategies now account for 20% of portfolio exposure at Glenwood Capital Investments and could rise if the region's variety of managers increases in ways that take advantage of a higher-volatility environment.

Glenwood, a Chicago-based firm with $7.5 billion of assets under management, and a unit of Man Investments Group, has traditionally had a low exposure to Asia strategies, mainly because the only type in abundance was equity long/short. Most of these are really long-biased. "These hedge funds don't short individual securities so they don't add a lot of value," says John Rowsell, Glenwood's CEO.

This is changing, however. The industry is maturing, managers are becoming more comfortable, and capital-market improvements put more tools at their disposal. But perhaps the biggest factor is the global economic environment; the credit crisis has crushed momentum in Asian equity markets, forcing fund managers to use skill rather than ride bull runs.

Glenwood is repositioning its asset allocation to reflect market conditions, and this will have an impact on the kind of managers it adds in Asia and Japan. And in this region, the hedge-fund universe is becoming more mature and diverse, giving allocators such as Glenwood new opportunities.

Among the types of fund managers it is looking at are those engaged in private credit, distressed plays, emerging-market activists and equity managers capable of running dedicated shorts. These are also strategies that would all require a premium on the rates of return they generate in developed markets.

Private credit is a risky endeavour that is akin to mezzanine finance, using privately issued convertible bonds to secure credit for companies, usually those dominated by a family. This activity works best where the rule of law is reliable, which is why Glenwood hasn't invested in this sort of manager in Asia. But it is looking, noting that markets such as China are seeing more of this type of strategy.

Says Rowsell: "You need to look at the level of diligence a manager can do on a family, and how people are securing their interests; for example, are assets held in trust?" India and Singapore are markets where Anglo-Saxon legal structures may make such plays viable.

Distressed plays can also do well in this environment. "Unless Asia is totally isolated from the US economy, there will be opportunities," Rowsell says. "There are still companies in Asia that borrow."

Glenwood has increased exposure to activist equity managers in developed countries but wants to find similar players in emerging markets, partly because M&A activity in the West is slowing. Rowsell says some deals in Korea, such as Korea Tobacco & Jinseng, show that value can be unlocked in companies, although this was a special case as it wasn't part of a chaebol û which is where a lot of that value will be found.

He is optimistic the activist model can work in North Asia, noting that even in Japan, despite high-profile problems (Bull Dog Sauce, J-Power), pressure by the likes of local pension funds has led to higher and more frequent dividend payouts. "Activists are losing the battles but may be winning the war," Rowsell speculates.

Finally he is keen to find long/short managers that really short securities. In the US and Europe, Glenwood has recently added dedicated short managers, after avoiding them for a long time. Such strategies don't appear to exist in Asia, but Rowsell says there is a small number of Asia-focused managers that embed dedicated shorts in their strategies. "We have seen emerging-market long/short funds with dedicated shorts, and over time, they have beaten the market, because of that discipline and low net-market exposure."

Glenwood is pulling out of long-biased, direction, merger-arbitrate and event-driven strategies, both in Asia and worldwide. Rowsell says the firm can generate the same returns now as it did a year ago, as higher volatility translates into more opportunities and greater dispersion of returns. But the past three months have hurt the portfolio because of liquidity problems in global credit.

"But we should still generate good absolute returns," he says. "Now is the time when investors really focus on funds-of-hedge-funds. Our 10-15% annualised returns look boring in a bull market, but not anymore."
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