Kier Boley is a London-based investment manager at GAM, a large fund of hedge funds manager and one of the investors in failed Aman Capital of Singapore. Here he fields questions about what went wrong, as well as discusses major trends in the hedge fund world.
How has the Asian hedge fund industry developed since GAM started investing here in the late 1990s?
Boley: There are two models Asia's hedge fund industry could have followed, the US model or the European model. The European model is more favorable to investors, and offers better transparency and liquidity. Asia probably followed the European model because most of the investors in Asia were European, and so that was their expectation. Also service providers, such as prime brokers' capital introduction staff, were usually relocated from London, so they had a much more European influence.
The Asian hedge fund industry started in the 1990s at the same time as Europe was growing. A few Asian hedge funds such as Joho and Boyer Allen grew rapidly. Then the market correction in 2000 saw the industry as a group suffer a huge capital loss. This put investors off for some time. Asia Pacific funds were unloved, many investors redeemed and funds were forced to close. The European industry however continued to grow and take in capital.
The second wave for Asia came after this, and these managers learned their lessons from the mistakes of their predecessors. They were much more cautious about accepting capital, and many kept their funds around $150 million or so to give them enough room to maneuver. They grew in size with very realistic views, in contrast to the US where we still see managers taking in huge amounts of funds in a very short time.
The other major development is the sea change in the views of the authorities towards hedge funds over the last decade. Singapore's MAS is an example of how Asian government have been enthusiastic about welcoming hedge funds to their shores.
Which Asian hedge fund strategies have performed best year to date?
Japan equity hedge has been the standout performer. 2004 was a difficult environment for this strategy as markets in Japan remained largely range-bound. Managers would keep increasing their net long exposure, expecting the market to break through the threshold, but it never would. They would then get caught in a draw down. It was a difficult environment as fundamentally they were bullish on companies, which have been increasing their dividend payout ratio. However due to structural or technical issues in the Japan market, the index did not break through the 12,300 mark. One particular cause was the large amounts of short volatility product being sold by Japanese banks.
The environment has now changed and the market has broken through this barrier on renewed enthusiasm for the prime minister, Koizumi. This saw volatility jump massively requiring the short volatility products to cover themselves and allowing the index to break out of its trading range. As a result Japan equity hedge managers have put on a net 5%-6% this quarter. The good managers are running a healthy 10-15% year to date, and we expect them to achieve returns of around 17%-20% for the year.
Globally the other strategy that is performing that well is European long/short. Although from a top-down macro level the economy is not exciting, on a company level, there is a lot of restructuring and there are good opportunities.
Geographically, which other markets have done well?
Outside of Japan the next strongest performer is India. We are looking closely at two India-dedicated hedge fund managers but have not invested yet. We have however enjoyed Indian exposure through some of our Asia ex-Japan long/short managers who have been investing there for a long time.
We were a bit concerned initially in 2004 when we saw about 15 new Indian hedge fund launches, all trading very similar strategies and looking to raise $150 to $200 million. But we feel there are growing opportunities for hedge funds in India.
How did you go about choosing which Indian hedge fund to invest in?
We look closely at the team and its credibility. Does their strategy fit their risk appetite and approach? Is it commensurate with their process? Why are they the sharpest and most competitive? We examine the source of their returns and whether they are repeatable and how long they can maintain their edge.
What will really expose the skills of these managers is a market correction, which we expect to see over the next couple of months. Liquidity can dry up very fast in Asia and can move quickly from market to market. Who can protect capital in this type of environment is the question.
We see China and India as multi-year opportunities so we take a long-term perspective in our decisions.
What type of investments have you made in China-focused hedge funds?
Compared to the Indian funds, the China hedge funds tend to differ more in their trading style and approach. We invest in a few different types of China hedge funds. One is a purely H-share high-volatility, high-return approach, and is very directional. Another focuses just on the A-share market, which we think will be a great trade once the government restructures it and addresses the overhang.
The other fund we invest in is a China opportunities fund that invests globally in China-themed plays. This fund is much more aggressive in using hedging strategies.
We also invest with a metals trader who trades the metal industry out of London and does a lot of dealing with China. The fund has done spectacularly and is up 33% to date. So far, much of his strategy has been China-focused, concentrating on being long those assets that China is short and vice versa.
Which strategies have been the worst performers?
Long volatility arbitrage funds have had a tough year, as volatility has reached historically low levels in the region. In the rest of the world, arbitrage funds tend to be more credit-related. Although people think of arbitrage funds as market neutral, really they are long credit. In Asia, these funds tend to be more long volatility.
But things are beginning to change. Volatility is already picking up in Japan. Overall, we expect Asian arb funds to return about 6% at best this year, which may seem low, but is still attractive for global arbitrage investors.
What were the lessons learnt from GAM's investment in Singapore-based Aman Capital, which was forced to return money to investors after suffering significant losses?
I can't say too much about that case. What I can say is that after the developments there we felt that the issues were resolved efficiently and cash was returned to investors. Of course, the experience was painful, but it was dealt with in the best way that we could have expected. The independent directors of the fund handled the situation as helpfully and professionally as they could. This stands in comparison to the US where such situations can become very difficult and potentially litigious.
In retrospect, were there signs you should have noticed that would have warned you not to invest in Aman?
For every type of situation like this in the industry, we set up a case study internally and our operational team explores the reasons of the fund failure and looks at whether our process and systems need to be revised in light of it. The main reasons for hedge funds getting into difficulty are due to NAV pricing issues. After Aman we did a thorough review of all our procedures, and although there were some areas where we tightened a bit, overall, the only thing we could have done better was to have redeemed earlier on the basis of poor performance.