Assets under management in Asian hedge funds stood at $19 billion in 2000. That number rose and eventually peaked at $176 billion in 2007. Then during the credit crunch, it fell back to the mid-$90 billion mark in 2009, before recovering to $116 billion as of August 2010.
So, there was life in the world of Asian hedge funds before 2000. Already in existence were a number of names that continue to thrive to this day, including Sparx Asset Management (1989), Value Partners (1993), LIM Advisers (1995), HT Capital (1997) and ADM Capital (1998).
By 2000 there were already 202 Asian hedge funds, but this mushroomed in the noughties to its 2007 high-water mark of 1,232 funds; it has since declined to 1,165.
More familiar names started in Asia in the early part of the decade: Ward Ferry (2000); Artradis (2002); Brooke Capital (2002); Tantallon Capital (2003); HDH Capital (2003) and its offshoots HDF Master Fund and Thaddeus Capital; and Central Asset Investments (2005).
The first wave of Asian hedge-fund portfolio managers came overwhelmingly from the fiduciary world of asset management. Nowadays the bulk of the hedge fund industry’s new entrants come from investment banking. They bring with them a different style to organisation.
Operationally, it is almost inconceivable today that a manager could operate without at least a strong chief operating officer, whereas in 2001 plenty of managers still saw business management as the investment partner’s part-time responsibility. Creeping institutionalisation has changed the way hedge funds are organised.
A number of the global hedge funds, which do offer institutional features, have come to Asia, pulled back, and are now migrating back again.
Those global funds have made a big impact on Asia throughout the decade, which is evidenced by the amount of assets they manage. At the beginning of the decade, one-third of assets under management in Asia-focused hedge funds came from the United States, and 20% from the United Kingdom. Today, those figures are 45% and 10% respectively.
In the last 10 years, global funds have gone from being night desks opportunistically trading Asia, to moving analysts out East, subsequently moving trading and finance here, and then launching an Asia-focused fund.
The Hong Kong/Singapore nexus has consolidated its title as the centre of the Asian industry, while Japan and Australia’s potential as international hedge fund centres has generally gone unrealised.
There are, however, mini-hedge fund centres in Bangkok, Seoul, and Shanghai, ones that did not exist 10 years ago.
However, despite the Chinese market being Asia’s most exciting and talked-about during the decade, its hedge-fund industry has been stymied by an inability to find a perfect hedge and various other structural issues, such as convertibility of the renminbi and QFII quotas.
Elsewhere in Asia, at the beginning of the decade, shorting was already in place in Singapore, Hong Kong, Japan and Australia.
During the decade, that ability to hedge was extended to South Korea and Taiwan. India did move in that direction, only to pull back.
Today, investors can put together a portfolio of Asian hedge funds that is diversified by strategy. In 2010, long/short strategies account for 38% of Asian hedge fund activity. (In second place is event-driven with 24%). Earlier in the decade, the concentration on long/short accounted for around two-thirds of the Asian industry.
‘Non-correlated’ strategies are almost half the sector today, compared with only 30% 10 years ago. However there are some strategies -- such as macro and commodity, volatility trading and event-driven -- that just didn’t exist back then.
Capacity constraints remain. Although the underlying liquidity of Asian markets has improved and hence the feasible size has increased, Asian hedge funds still need to be significantly smaller than their global counterparts in order to maintain performance and manage risk.
While a decade ago we’d have considered $250 million to be getting unwieldy in Asia, that number is now probably $500 million. However, a manager that is investing $1 billion around the region is still sailing into a strong headwind, and more than half of Asian hedge funds today have less than $50 million of assets.
As the decade moved into its second half, Asian hedge funds enjoyed their best growth spurt.
It was at a time when markets in general were rising, and with hindsight perhaps this led to a false sense of security. A few bad habits of were allowed to fester, and some hedge funds performed well simply by piggybacking the upward momentum in the stock markets or taking concentrated bets.
We started to speak of the ‘convergence’ between hedge funds and private equity funds as hedge funds increasingly did illiquid and pre-IPO deals without being mindful of redemption terms.
The day of reckoning finally came in 2008, during the global financial crisis, when hedge funds that had done well were treated as the proverbial ‘ATM’. Hedge funds that did not perform well were exposed for their market-following tendencies.
Funds dealing with illiquids such as the Asian distressed sector came to a crashing halt as investors put in full redemption notices. The major distressed players in Asia peered over the abyss. Some big names in the Asian industry like Basis Capital, was founded in 1999 by Steven Howell and Stuart Fowler, took massive hits from subprime.
Gates and side-pockets were erected in some cases. Proportionately there were not as many of these in Asia as elsewhere in the world, but there were enough to tarnish the industry’s reputation, even though no hedge fund asked for a bailout from a government.
Asian hedge funds remain minimal users of leverage, with 200% gross being the outer limit for the majority of equity-focused funds. Whether they liked it or not, such leverage vanished into thin air as prime brokers came even more of a cropper during the credit crisis.
Resolution of the hedge funds’ exposure to the failure of Lehman Brothers’ prime brokerage continues to be a matter for the courts. Accordingly there has been a move towards dual prime-brokerage relationships.
The core service providers today are the same as at the beginning of the decade, with HSBC consuming the lion’s share of the administration pie, and Goldman Sachs and Morgan Stanley taking the centre of prime-broking world.
However there are far more providers competing in niches, and, compared to 2000, a greater range of “outsourceable” services, from risk management to marketing to compliance.
Larger funds have inserted investor-relations professionals between themselves and their investors. It is therefore much harder, and slower, to qualitatively evaluate managers now than it was 10 years ago, as investors have to fight through the ribbons and packaging in order to understand the underlying proposition.
Due diligence, meanwhile, has evolved from perfunctory to comprehensive, to overkill.
Today the biggest complaint among hedge-fund managers is the challenge of raising capital. Nonetheless, even in today’s relatively straightjacket market, capital is easier to find.
There are many platforms, seeders, prime brokers and marketers prepared to help raise capital. There is a small but growing pool of Asian investors supporting the industry, whereas 10 years ago virtually every penny had to be raised from investors from outside the Asian region.
In the final years of the decade, new names joined the hedge fund world. Some notable entrants include Broad Peak (2007), Mount Kellett Capital (2008), Senrigan Asia Event Driven Fund (2009), Isometric Capital Management (2009), Cypress Lane (2009), LionRock Capital (2009), Trivest China (2010) and Turiya Capital (2010).
Despite a tumultuous decade, the Asian industry has not only survived, but appears to be setting the stage for a prosperous decade ahead.
Contributions to this article and data were supplied by Peter Douglas of GFIA and Morgan Stanley.
This article was originally published in the September 2010 "Decade" edition of AsianInvestor.