It has become apparent in the last few months that Asian
focused hedge funds are hot. Sitting in Asia, this is evidenced
by the rate at which the more established funds are closing,
and the facts that several new funds are being created every
week and that a long queue of Asian fund of fund products
is in the pipeline. What is not so evident are the underlying
causes of this sea change.
Our recent travels have given us some idea of the concerns
that are driving this process.
Firstly, there seems to be growing disillusionment with Wall
Street and what could be argued is an over-hyped US market.
Even the US government is questioning the extent to which
vested interests have been influencing stock ratings. Beyond
Congress, the concern is probably not so much with what is
known but with what lies beneath the surface. If an Enron
and an Arthur Andersen can collapse so spectacularly, what
else is out there in an economy and financial system stretched
by record levels of consumer debt and trade deficits?
Compare this to Japan. It has been nearly 13 years since
the Imperial Palace in Tokyo was allegedly worth more than
the whole of California. This is a country with problems,
admittedly, but at least they are largely out in the open.
Perhaps, the bubble to be worried about is in America. The
bubble in the Asian stock markets has by most accounts been
deflated. Some of the more risk-averse money in the West appears
to be taking this view and is moving assets overseas to hedge
its bets, and some of that is coming to Asia.
Another factor is that fund of fund managers and family offices
are starting to forgive and forget the money that was lost
on the first wave of Asian hedge funds. These shoot
the lights out directional funds, which in retrospect
were not really hedge funds at all, left a bitter taste. Those
that have survived have mainly morphed into process driven
hedge funds that more closely resemble their brethren in the
The new generation of Asian hedge funds is much more the
classic alpha extractor type than the personality cult of
old. They may not outperform in a bull market but they have
the risk management techniques in place to avoid large drawdowns,
and are better able to produce consistent, positive returns.
There is also a growing feeling that alpha is easier to earn
in Asia. Partly, this is due to the relative size of the hedge
funds in Asia versus the depth of the underlying markets.
There are believed to be some 5,000 hedge funds focusing on
the US markets, which account for 50% of global stock market
capitalization. In contrast, Japan represents 9% of the world
equity market, whereas our research concludes that there are
less than 60 hedge funds focusing on the country. It is easy
to conclude from this data that mis-pricing has not been arbitraged
out of the Asian markets to the extent apparent in the US.
Of course, Asia does have constraints on liquidity and shorting
potential, but in the liquid markets of Japan, Korea and Taiwan
the alpha is plentiful.
To get the sort of returns that the typical pan-Asia long
short fund is throwing up today a comparable US fund would
have to be geared. In the Asian fund world, gross exposures
rarely exceed 100%. Of course, the growing interest in Asian
funds is also no doubt motivated by the strong performance
of the regional equity markets so far this year.
These are largely anecdotal points but it is this sort of
feedback that convinces us that the view from Berkeley Square
is looking more and more eastward.