Hedge funds talk opportunities post-crisis, part 2

In the conclusion of AsianInvestorÆs roundtable discussion, prominent hedge fund managers and investors in Hong Kong pick the best asset classes for the next 12 months.

AsianInvestor organised a roundtable discussion featuring prominent figures in Hong Kong's hedge fund industry. Yesterday they discussed how last year's performance has affected the outlook for 2009; what investors are looking for; and how long these managers intend to stay in this business. Today the roundtable concludes with a discussion about the popular perception of hedge funds and how that may impact regulation, and an airing of what strategies and asset classes are going to perform best over the next 12 months.


Geoffrey Barker, Ballingal Investment Advisors
Tobias Bland, Enhanced Investment Products
Aaron Boesky, Marco Polo Investments Group
Jeff Fisher, RAB Capital
Bob Howe, Geomatrix (HK)
Paul Sheehan, Thaddeus Capital Management

How do you react when you see the popular press and politicians attempting to scapegoat hedge funds for the financial crisis?

     Toby Bland
Toby Bland: A lot of the press in the financial field do not understand hedge fund techniques and tactics, so just make the claim that it is all a big black box. It would make a significant difference if the financial press took time to understand hedge fund strategies and instruments.

Has the Bernie Madoff scandal affected hedge funds' image?
Aaron Boesky
: Before Madoff I used to catch a lot of rap for my surname, but I'm probably one of the only Jews on Wall Street who benefited from Madoff, as my family name is out of the press now. Madoff's is the new name. It sucks that the industry had to take it for him though, we all pay for that and I don't think it's fair. He deserves the penalties he receives.

     Jeff Fisher
Jeff Fisher: I teach about hedge funds at a Hong Kong university, and I wrote on the board the names of Madoff, Meriwether, Long Term Capital Management, Descartes, Charles Schmitt. Not one of the students recognised a single one of those names. They ring true to us because we're in the industry, but not to those outside of the fishbowl.

Does the stereotyping of hedge funds lead the average voting person to make misassumptions about the industry? For example, that hedge fund shorting brought down Lehman Brothers.
Paul Sheehan
: There are lots of non-average people saying that too. For instance: regulators and Dick Fuld. People who ought to know tonnes better.
Jeff Fisher: With hedge funds, it's possible to personify their depiction by pointing to a specific individual, like a George Soros-type. When attempting to portray an institution in such terms it's much harder.

Toby Bland: Hedge funds don't strive to put out positive public relations, unlike the banks, which are constantly telling you how wonderful they are.

     Paul Sheehan
Paul Sheehan: If you make money for anything other than kicking a ball, people aren't going to love you. I cringe when I hear of places in cities that are labeled as 'hedge fund hangouts'. It's not very alluring.

Will this result in a regulatory clampdown?
Geoffrey Barker
: There's more of a terror right now in London, with managers wondering how to tackle the new EU regulations and how they can get them diluted. The popular image is wrong and hedge funds were probably the group least responsible for this crisis. The image is poor -- one of greedy hedge fund people -- so it's entirely possible there is going to be some regulatory backlash against us.
What about in Asia?
Aaron Boesky
: There isn't much changing in China's regulatory stance. There are some simple regulations that could be discussed. For example, if you wanted to qualify as a hedge fund manager, you shouldn't custody your own assets and administer your own fund. If you want to be a broker or bank asset management then you could do so. If you want to fall outside of regulation then you shouldn't be able to make your own statements. I don't think it's necessary for them to come after alternatives managers as long as we are using third-party administrators and auditors. I think the regular asset management business has lost investors a lot more money than hedge funds have done.

     Geoffrey Barker

Toby Bland: Most funds already have compliance officers now. When we came to market in 2002 we had a good rapport with the [Hong Kong Securities and Futures Commission] and getting everything through was quite straightforward. Now the SFC goes through everything with a fine-tooth comb. Most of it is self-policing. If you want to be around in five years time, you'll have a risk manager and a compliance officer.

How do you perceive opportunities in the markets?
Geoffrey Barker
: The biggest issue in my mind is the effectiveness of the China stimulus package versus the ongoing crisis and global balance sheet adjustment. I'd put myself in the bear camp. Without having had a significant strengthening of Asian currencies, we are not going to have a Japan-style bubble-boom. I think we are in a deflationary environment, have had our bear market rally and have a long period of adjustment ahead of us.

How do you reflect that bearishness in the portfolio?
Geoffrey Barke
r: I'd be short cyclical equities, Asian currencies, commodities and gold, and long US dollar. That's my one-year view.


     Bob Howe

Bob Howe: Earnings revisions ratios have improved since February in every global market, and liquidity is still ample, so this is the sweet spot for equities and, in particular, Asian equities. We are long Asian markets, building positions in long-term winning companies in China, ready to hedge if our models show a correction.

What stories do you like?
Bob Howe: Our largest position is RexLOT, which we think will be the G-Tech of China in lottery management. In Japan we have gone long the Reits and the small caps, two key asset classes that have fallen again some 80-90% from recovery levels in early 2006. Our other preferred market is Korea, where valuations are cheap, a currency collapse and dollar debt problem no longer likely, and the currency weakness the past year coupling with some world-beating manufacturing in some key, very large industries, such as autos, flat panel displays and batteries.

Toby Bland: I think volatility will go back to 2005 levels, which makes it a more difficult environment to make money. EIP are discussing strategies that thrive in low volatility. Dispersion and correlation trading can be ways to benefit.

Jeff Fisher: We are in a commodity super-cycle and currently in a downturn in that super-cycle. This as a rare buying opportunity for hard assets in the ground, such as undeveloped oil, coal and energy plays.

Paul Sheehan: Liquidity is easier now: that problem is fixed, although I have qualms about the way in which it was fixed. Credit problems are sticky and it takes forever to work them out. In three years' time I think this will still be grinding on, especially since the policy response in the West has been inadequate. I can see the potential for a return to 1970s-style stagflation. So that means the event-driven trades would be bailout trades and corporate restructurings, messy long-term situations. People in Asia will recall that restructurings tend to be the best part of the event cycle, but timing is all important so a key skill here will be to sit on our hands and wait for the opportunity.

     Aaron Boesky

Aaron Boesky: From a macro point of view globally, I think markets with ageing demographics such as the USA, Japan and UK are going to be in trouble and you want to look at China and India. China is a cash market and that cash is ready to come back in, the liquidity is there and can't leave. I think investors want to buy a combination of infrastructure, liquidity and youth.

Paul Sheehan: Is there anyone here selling youth?

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