FinanceAsia spoke with Jennifer Carver, director at Hong Kong based hedge fund CSA.
What's the background of CSA?
Carver: Charles Schmitt started the business in 1992 after 14 years on Wall Street. He started by managing private client money in Hong Kong. Then in 1997 he started looking at hedge funds and created an ad hoc fund of funds for his clients. We now manage about $140 million, of which over half is in hedge fund strategies. Since 1992, the overall portfolio has averaged 15% a year and since 1997 the hedge strategies have averaged 16.5%.
In February last year we decided to launch a proper fund of hedge funds, which mirrors the strategies we invest in for private clients, the same asset allocation, same strategies, called the CSA Absolute Return Fund. That's returned 9.3% in its first full year. This fund invests in 10 sub-funds and seven different strategies.
Could you describe the fund you recently launched?
Due to the success of the Absolute Return fund, we've launched a leveraged version. What we've done is work with Van Hedge Advisors and a large North American bank to create a three times geared fund. The bank is providing the leverage in an option structure that's invested in a basket of 21 sub-funds. In its first real month of existence, January, it was up about 5.5%.
What strategies does the fund include?
The fund has the whole range of market neutral strategies from convertible bond arbitrage to equity long/short and market timing. We also have multi-strategy funds, which have the flexibility to move between arbitrage strategies much faster than we can.
Do you have any managers based in Asia?
We're only invested in US managers at the moment. When we started investing in hedge funds in 1997 there weren't many any Asian based managers and we're still basically invested in the original 10 now. The new 11 funds we added for the new leverage fund are also US managers, because we've been monitoring them for a long time and the North American bank that's providing the leverage was more comfortable with US managers.
It would be nice to invest in an Asian based hedge fund as we know most of the managers here. The first two years of a single strategy hedge fund's life often gives the best performance, but it is also the riskiest time. So we like to watch them for a while before we jump in and so far that has served us well.
Do you have any Asian pension plans or insurance companies as clients?
We were short-listed and got very far down the road with a couple of large pension plans who, in the end, decided to go with a big name. We were short listed for one particular mandate where we were up against three big, blue blood companies and we got down to the last two and after much debate they went with the incumbent. It was encouraging to us that we got that far. An insurance company in Taiwan is interested. We're looking at structuring something for them so they can invest in our fund. So there is definitely interest, and more so in fund of funds because of their less risky nature.
Any plans for a retail fund here in Hong Kong?
At the moment we can't get our Absolute Return fund authorised here, as we don't have the required $100 million in hedge strategies. We have $85 million, so we're getting there. But frankly, we are getting a lot of assets into the fund that are non-retail. So we don't really need the retail market for that.
How do you perceive the hedge fund market in Asia?
The outlook is mixed. From a manager's perspective there's going to be continued clearing out of the guys who raised $5 million and went off to start a hedge fund but couldn't afford to stay in business. This is a good thing. I think you'll see the more professional managers emerging and that will raise the profile of hedge managers in Asia. There's a lot of money in the US and Europe looking for Asian single strategy managers. So I think managers that have significant assets under management and a good track record will do well.
The real constraint you have out here are the actual markets. You just don't have the kind of investment opportunities you do in the US. That is another reason why we have yet to invest here. There are a few managers out there but the market really needs to get more sophisticated before we see more activity. That will come. The general investor populous is getting more sophisticated and starting to accept hedge funds as a possible investment. I don't get the 'what about LTCM?' argument as much as I used to.