David Lee runs the Ferrell Asia fund, managed by Ferrell Asset Management Pte Ltd, which was established in Singapore in 1999. David Lee is the MD and CIO. He has more than 15 years' investment experience, having previously headed Fraser Asset Management. The company has US$25m under management, all of which is managed on an absolute return basis. The Ferrell Asia Fund has US$5m of assets. The Ferrell Asia fund was 0.1% for August 2002 and is 3.4% YTD at the end of August.
Interview with David Lee
- You will be making a marketing trip to Europe soon; what are the themes regarding the Ferrell Asia Fund and hedge funds in Asia that you will be emphasising?
Positioning Asia in a total global portfolio will be our focus. US and European markets have been doing extremely well for say, for the last decade or so. There was an upward trend until recently. Fund managers saw few compelling reasons to allocate assets to Asia. In fact, the '97 Asia financial crisis caused further damage to confidence in Asian assets. Transparency and liquidity in the Asian markets have always been the key issues. Staying away from these markets seemed the logical thing to do. Recent events in quick succession happening in the west, however, prompted global fund managers to consider Asia seriously. We are not saying that US and Europe are going down and Asia is going up from this point on, therefore you should put your money in Asia. Rather, we emphasise diversification geographically and the abundance of profit opportunities.
First, with the exception of Japan and Australia, tradition and regulation in Asia creates inefficiency and opportunities for a long/short strategy. Secondly, the cost of monitoring risks is high due to complex situations in Asia with most proprietary desks shrinking in size, giving hedge funds great opportunities to profit in the absence of large and established institutions. Thirdly, the advancement in technology and development of new instruments allow the use of long/short hedge funds to operate and profit from advanced data feed and the use of derivatives. Finally, these opportunities are not going to disappear for a long time given the uneven growth in Asia and adding to that, the uncertainties in economic growth give rise to more opportunities.
- What investments have worked well for the Fund this year?
Our fund is a long/short equities fund. We believe our success comes from our ability to manage risk, to read both up and down trends accurately, and also to spot market inefficiencies quickly to translate these into returns. Given our use of information technology in risk management, we are able to implement strict and clear stop-loss rules for predictable results. We were able to achieve a return of over 2% in September alone last year. For this year, our returns came mostly from the net long and hedged positions in the first half. We were trading mostly in Korea, Thailand, Malaysia, Singapore and Hong Kong. For the second half of the year to date, most of the gains were from short positions in technology stocks and long positions in gold-related stocks.
What are the positives in running a hedge fund out of Singapore? How do you make investors in Europe and the United States feel comfortable investing in the Fund?
Singapore has the infrastructure and the backing of a solid regulatory environment provided by the MAS (Monetary Authority of Singapore). We are enjoying very efficient telecommunication services, timely data services, a good supply of talented finance and legal professionals and also, supportive and proactive attitudes from MAS. Singapore is considered by many to be the "no-nonsense" city-state. Besides being registered in Singapore, Ferrell is also regulated by the Hong Kong Securities and Futures Commission.
We also work with eminent US and European investment consultants in Singapore, when necessary. For those who require an independent evaluation and monitoring, employing the service of an investment consultant would provide another layer of comfort.
We are only 12 hours by flight to London and less than 18 hours to the west coast of America. We have never allowed the distance to deter our business-development unit from visiting our clients on short notice.
- What sectors are you positive on in Singapore?
Upscale services could be the star sector going forward. Those with the talents, expertise and professionalism to provide services for the working communities here and the surrounding region will have a higher chance of success.
Manufacturing might be on the downtrend here but other important processes of bringing products to customers can still be done out of Singapore. Research, education, healthcare, marketing, business development, delivery, distribution, after-sales services are some examples. Singapore has many local talented individuals and knowledge management is the key to future success. Given the comfortable and familiar living environment for most foreigners, it has the conditions and ability to attract foreign talents to re-locate here.
However, our strategy in Singapore would be to search for opportunities for hedged trades among traditional industries that are going through a difficult time in re-adjusting and re-structuring themselves and long positions in industries that are more protected and fairly insulated from the global slowdown.
- What other countries and sectors in Asia are you finding interesting on both the long and short side?
In the short term, it is going to be a difficult call for long positions because of the uncertainties of war in the Middle East and the fear of a double dip in the US economy. Although we are still on the bullish side for Korea and Thailand, we remain cautious as things could change very quickly. KOSPI was at a high of 900 plus in April and now the index is hovering around the 700 region. Gold and gold-related stocks could be an attractive alternative asset class. There are also good opportunities for directional trade in a sector like gaming, which has surprised analysts on the upside. Given the diversity of the Asian markets, however, it is not difficult to find long/short ideas in the same sector. Indeed, different markets have different characteristics and are at different stages of development. Even in the technology sector, we see good opportunities for pair trading in semiconductor stocks.
What do you think the role of Asian proprietary desks will be like in five years time?
Asian proprietary desks will probably have a lesser impact in 5 years time. Given that there could be further growth in North Asia and uneven growth in South Asia, the cost of monitoring risk from the headquarters for proprietary desks are likely to outweigh the benefits of such operations. On the contrary, hedge funds, being specialised would have lower costs, and thereby be able to achieve better "risk adjusted" returns. There is a strong case for adopting the fund of funds approach for proprietary funds for Asia. The complexity and volatility of managing the funds from outside Asia would be than direct exposure to equities and fixed income, and yet retain flexibility.
- What is the environment for short selling in Singapore like? Also, generally in Southeast Asia?
There is no specific obstacle to short selling in Singapore. The prime broker should be able to provide this service with ease. The environment for securities borrowing and lending has improved tremendously in the last few years. The same can be said of Japan, Australia, Thailand, Korea and Hong Kong. However, short selling is prohibited in Malaysia and the low liquidity in Indonesia and the Philippines makes short selling less attractive in those places.
- What do you see the role of the directors of the Fund as being?
Risk management and focusing on meeting the investment objectives. We are not aiming for unrealistic returns. Even if potential returns are present in a particular investment, we always look at the risk involved. Is the investment worth the risk taken? Most of the time, we prefer to stick to our mission of providing a "smooth" absolute return for our fund. We feel that it is important that the fund is well diversified in terms of geography, industry, sector, and that we avoid all concentration/event risks.
The Fund is not allowed to leverage up; why was this decision made?In Asia, it is important to avoid disastrous event risk, which is at its highest when liquidity dries up. If we were leveraged and on the wrong side, it would impact negatively on the portfolio, especially if we could not hold on to current positions. Again, we do not need to take unnecessary risk to achieve the required returns of 20% in the medium- to long-term. Leverage works both ways on the up and down side. Further to the restrictions of no leverage, we manage liquidity risk by ensuring that we trade only in liquid stocks with good daily trading volumes. The gross exposure of the fund will never exceed 100%. We will not exceed net short of 30% and net long of 85%. Despite the strict risk management parameters, attaining the expected returns of 20% is achievable. We avoid taking on unnecessary leverage risk.
Ferrell Asset Management Pte Ltd
+65 6536 6623