Paris-based HDF Finance has recently opened an office in Singapore and is on the lookout for hedge funds with a regional focus in areas other than equity long/short.
The $3 billion funds-of-hedge-funds specialist prefers to market focused, niche products, and in Europe it can offer strategies in fixed income, credit, volatility, currency, macro and managed futures. But 90% of its current exposure to Asia-focused strategies is equity long/short.
The Singapore office will help research regional managers that will allow HDF to expand its Asia offering, as well as provide a platform to market to regional institutions and private banks, says Sebastien Cabanel, managing director in Singapore, who moved to Asia last year from France.
The firm currently has 15 hedge funds in its portfolios that either are based in Asia or have the majority of their exposures to the region. It now has managers in Hong Kong, Singapore and Tokyo, and is considering some in Australia.
When it comes to manager selection, fees are not the priority. Cabanel is sceptical that fees will come under discussion for managers that can prove outperformance, and the 2+20 structure will endure.
"We are happy to pay fees if net returns are good," he says. But funds must justify such fees, not just on the basis of experience and a track record, but also by proving their risk-management skills. Fees that go to paying senior and empowered risk managers are worthwhile, he says.
HDF is also avoiding "fakes" that are mimicking private equity. The firm dislikes funds with side pockets and the like. "Funds must have assets they can actively hedge, otherwise it's just a type of long-only strategy," Cabanel argues.
Although HDF had to gate redemptions, he says the firm has long had a policy of matching available liquidity to that of the underlying strategies, and HDF did not alter the liquidity conditions in its contracts with clients. It did in some cases postpone redemptions when these exceeded 10% of the fund's NAV, as stipulated in its contracts.
Its multistrategy and long/short equity funds-of-funds experienced negative returns in 2008 but a trading strategy managed to gain 2.5% last year.
HDF already has insurance companies and pension funds from Japan and some institutions and private banks from Hong Kong and Singapore as clients, and is looking to expand these relationships in the region, including in Taiwan.
Cabanel says investors disillusioned with hedge funds aren't considering the fact that in the current extreme environment, the fall in liquidity and trading volumes, and the mass liquidation of assets, has led to high correlations among asset classes. Once markets stabilise, correlations will fall.
Also, many institutions, notably Japanese pension funds, have tended to use funds-of-hedge-funds that are global multistrategy vehicles with low risk, which means they are most highly correlated to beta. There is room, therefore, for providers with more specific fund-of-hedge-fund products, he argues.
For HDF, the challenge is convincing investors of the merits of less aggressive funds-of-funds. He says the firm's offerings are targeted but stable. "We're not going to provide double-digit returns in a bull market," he says, noting the firm's philosophy is to provide two-thirds of a bull-market upside but expose investors to only one-third of a downmarket loss.