Hedge funds talk opportunities post-crisis

AsianInvestor hosted a roundtable discussion of some of Hong KongÆs prominent hedge fund managers and investors, who say that good returns in 2008 is proving no guarantee of easy growth in 2009.
AsianInvestor organized a roundtable discussion featuring prominent figures in Hong Kong's hedge-fund industry. Today they discuss how last year's performance has affected the outlook for 2009; what investors are looking for; and how long they intend to stay in this business. Tomorrow we will run part two of this roundtable.

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

If you did all right last year, is this year easier?

Paul Sheehan: I think the pressures on investors are such that even if you had a good 2007 and 2008, when it comes to 2009, they will still have a 'what have you done for me lately' mentality.

What messages are you hearing from investors?
Paul Sheehan
: It's hard for investors right now. The value proposition for hedge-fund allocators is a lot more difficult and challenging than the value proposition for those who manage money. At the end of the day someone has to manage the money. After Madoff took a walk, the demise of Lehman, and not a good year for performance, many allocators are under pressure from their own investors, and it falls to us to understand and support that.

Geoffrey Barker: They're a fairly loyal group. I think they expect us to be a bit cynical, glass-half-empty types and take a run at things that have become over-expensive. We'd have grief if we tried to change our spots in any way. That said, we aren't a bear fund. We are value and contrarian. It was fine to be bearish over the last 18 months, but there's no guarantee we will stay aggressively that way. As long as we continue to be contrarian I think we'll continue to attract funds.

What about for China-focused strategies?

Aaron Boesky: We had net subscriptions in 2008 even when Shanghai was one of the worst performers. Perhaps it's something of a China mystique, but people don't seem to want to just walk away.

What do investors seem to want now?
Robert Howe
: I have mostly high-net-worth individuals who have stayed loyal while I've been in Asia. Equity allocations from the bigger players have fallen with stock markets. The consultants who advise them told them not to upweight toward long-term equity targets until mid-March, when Geithner and Bernanke started to make more sense, and it became clearer that the western financial system was not going to completely melt down. At that point we started to see program buying from institutions. That lasted through to the end of June. Now they are looking for active, hedged management, looking past Madoff and looking past an average hedge fund drawdown in 2008 of 17-19%, depending on the performance database.

Are Asian institutions active?
Robert Howe
: Within hedge fund categories, we hear of institutional interest in Asia, as it is clear that these markets are growing fast. China just surpassed Japan to become the second largest market in the world. However, when investors shop for Asian hedge funds, there is a bias towards larger funds. For institutions, even $100 million under management is too small.

Has the capital raising environment improved?

Jeff Fisher: There is tactical allocation switching now in portfolios. In 2008 funds of funds switched out of directional long/short, because they were being killed. Now they are switching back into low net exposure funds. They don't want much directional exposure, but they do want some equity exposure in case the market goes up and protection if it goes down.

There's also been switching into fixed-income funds, and a slew of activity there. That's because they are non-correlated with equities. Thirdly, institutional investors want protecting from business risk and so they look for large funds, frequently ones with over $1 billion in assets. This could be a vintage year to buy distressed assets, but few are going to want to do that with a start-up.

What strategies continue to offer alpha opportunities?
Toby Bland
: EIP have been chosen to manage a fixed-income fund next month which will invest in investment-grade bonds.  If I could launch another fund it would be themed around dispersion, as the world is so correlated.  EIP have been putting on trades around selling correlation in our existing funds.

Jeff Fisher: I think the best opportunities are with illiquids. There are large chunky real estate and special situations assets out there, for example the assets Lehman once owned in Thailand. We haven't had the capitulation trade yet.

Are your strategies still in vogue?

Geoffrey Barker: We're in a balance sheet adjustment globally, so there will be ranges as opposed to long term trends and maybe new lows in the equity markets. With that in mind I think that fits my macro strategy as I don't think we're facing a new bull market, and therefore require different ways of making money, and that's our advantage.

Paul Sheehan: Our focus has been to try to be the best among event-driven funds in the region, but of course this is a much smaller universe than it used to be. De-leveraging has driven a lot of capital out of these markets, particularly people who used to be opportunistic in the stuff we look at, like prop desks. Some of the global hedge funds who thought it easy to extend their strategy into Asia perhaps realized it wasn't as simple as opening up an office here. There are some wrenching economic changes, which mean there are still involuntary corporate events, and we like those.

What would be your advice to new hedge fund managers?

Toby Bland: My advice would be to take money slowly. People can open up and get flattened on day one because their strategies can't cope with the money. Liquidity in Asia is such that there's usually only two or three markets that you can deal, Korea Taiwan and Hong Kong, and in the peripheral markets it's hard to get invested. If you go in with big visions about what you can do, you risk having style drift from day one. So if you're coming in, sponsored say by your old bank, then my advice is to take less money. However, the stakes are of course much higher for the person managing friends' and family money.

Paul Sheehan: I think it matters less where you come from, whether a prop desk or another fund. I would say the bar is a lot higher now than ever before. It is harder today for funds that start small and then mushroom because of the infrastructure required. The tolerance for error on the risk and operational side is almost nil at this point.

Geoffrey Barker: You have to be able to demonstrate that you will stay the course, but I think the sustainability of the strategy and the credibility of the team are more important than being able to raise significant capital on day one.

How has the use of fund platforms changed?

Jeff Fisher: The platform business works if you have capital, not the promise of capital. The benefit of a platform is that it allows the manager to take for granted all the other things, such as ISDAs, legal, operations and compliance - but the capital has to be ready. Money talks.

Prospective managers have to examine what route they want to follow, a 2-and-20 business model with an aim to increase AUM as fast as possible, or is this the kind of thing they want to be doing every day for the rest of their career?

In the past, from the 1960s to the 1980s, you had the old retired Don of Wall Street, and he would manage he own money, and people would invest along with him. Now that the business is institutionalized, investors want to peek behind the curtain to ensure that the business is being run well.


So how long are you all still going to be doing this? Ten years? Five years? Next week?
Aaron Boesky: All of our partners have just recommitted for another five years. We did well in the first five years, even though the last two years were a bit of a check. Anyone still standing is in for another three-to-five years. I don't think you would have gone through what we've just witnessed, and then stop now.

Geoffrey Barker: It's very tiring and it's full-on, all the time. I can see how people can burn out. You need to have the right team of people around you so that you can sustain yourself. If I go on holiday, after about three days I want to know what's going on. I have a problem going away - so that probably means I am a lifer. Regarding the fund positions, I need to keep an eye on those positions all the time.

Paul Sheehan: A lot depends on the clients, and whether they think we're continuing to turn up good ideas. If you still have good trades in you, and you're still putting up good numbers, then this is one of the most fun games there is. So the answer is, yes, I hope so, but it is demanding and it is draining. If it's not the sort of life you are driven to lead, you probably shouldn't do it. It's the sort of life you should lead when you have no choice.


Bob Howe: A long/short manager faces very heavy demands. The ability to go away on holiday and turn off completely from what's going on in the world, which I used to do confidently as a long-only manager - that's not an option in hedge-fund land, which is much more all-consuming. But if we have gotten through the past year's firestorm emotionally and
financially intact, we probably are lifers and love what we do.

Tomorrow: our panel discusses the politicization of hedge funds, public perceptions about the industry, and investment opportunities.
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