Interview with Paul L Heffner, Partner and Portfolio Manager of Ajia Partners Alternative Investments Group
Ajia Partners is a private partnership based in Hong Kong with US$1.8 billion AuM focusing on fund of hedge funds, private equity, real estate and public equity investments with a focus on Asia.
Moses Tsang, former chairman of Goldman Sachs (Asia), and nine partners provide leadership for the firms with 80 employees. In its various businesses, Ajia Partners has strategic partners that include Goldman Sachs, ABN AMRO, Woori Bank and Mitsubishi Corporation. The fund of hedge funds group has 12 people in Hong Kong and Tokyo currently managing just over US$200 million and is headed by Paul L Heffner. Paul joined from the Novel Group, a major Hong Kong family office and started his career in Asia with Morgan Stanley. Dickson Mak (previously with Vision Investment Management) heads up research and manager selection, while Alan Wong (previously with KGR Capital) is responsible for risk management and quantitative analysis.
Ann Standard Deviation
(risk free = 4%)
Asia incl Japan Multi-Strategy
Ajia Partners manages a Japan-focused fund of hedge funds as well as a broader Asia-focused fund of funds. Are there any appreciable changes in any aspect of the investment process, between investing in emerging vs developed Asian markets?
We apply the same investment process for these two mandates as the focus is always on the more liquid, developed Asian markets. These markets make up over 80-85% for our Asian fund and more than 50% of the underlying managers have weekly or monthly liquidity. To enhance our view on the different dynamics of each market, we talk to our local partners as our firm is also engaged in other businesses, such as private equity and real estate. This allows us to obtain first-hand proprietary information which is typically not available to others. Our edge versus other peers comes with the fact that we are within a sizeable organisation while independently managed due to compliance reason but we can tap into the firm’s resource when necessary.
How do you go about selecting hedge fund managers to include in your portfolio? What is the duration of your manager selection process?
Apart from our rigorous bottom-up due diligence on the managers, we also take a 6-12 months’ macro and portfolio management view when including the managers in our portfolios. This process has served us well – our Asian fund is one of the few Asian funds of hedge funds that achieved over 10% in 2006. As an example of our rigorous bottom-up operational research, the research team would even check the electricity bills and rental agreements while conducting on-site due diligence. This detail oriented process is to ensure that we eliminate as much business risk as possible when investing with any manager.
The typical duration of manager selection process ranges from 1 to 6 months depending on the complexity of the strategy and the business risk associated with the manager. Our research team travels across the region every month and we can move very quickly in including a new manager if necessary. However, we have skipped a few managers who were closed to new investors on day 1 since we were not able to obtain a satisfactory level of confidence.
Furthermore, our philosophy is that hot managers and trophy names do not automatically qualify to be part of our line-up.
What steps does your risk-monitoring process entail? What criteria do you use to evaluate underperformance among portfolio constituents?
Our risk-monitoring process consists not only of quantitative analysis but also qualitative analysis. Both our research and risk management team would visit our underlying managers on a quarterly basis separately. On the quantitative side, we apply risk metrics to track the managers since we are able to obtain satisfactory level of portfolio transparency. For the qualitative side, we look at the consistency of the mindset of the managers as well as the changes associated with the companies.
If there is underperformance by our managers, we try to understand the reasons as well as working alongside with the managers to see how they can improve. These reasons often tend to be either market specific or manager specific. Given the depth of our firm, we are often viewed as a strategic investor by our managers. Firing a manager has always been our last resource; but if we don’t see a significant improvement in the performance or a willingness to work with our team, we will redeem.
How dynamic are your portfolio allocations? What is the average holding period of your investments?
Our top-down view dictates the strategy and asset class allocations and we are very dynamic but often contrarian. We dislike crowded trades and tend to invest early in turnaround situations. This has been proven fruitful as we had the lowest drawdown among our peers. Our average holding period is 12 months or more but we do increase or decrease the weighting of the underlying managers as our fund size enables us to be nimble and flexible. In our opinion, we would like to limit the AuM of each fund to US$300-500 million depending on market conditions. Our objective is to generate great risk-adjusted return for our investors and the portfolio allocation is one of the key drivers of our performance.
Does the fund target any specific sectors or asset classes? What is the typical breakdown of portfolio allocations among various sectors, asset classes and investing styles?
Both of our funds are multi-strategy focus so we look at all the different sectors and asset classes. Equity long/short usually consists of 50-60% with the rest in activist/event driven, Asian macro, fixed income, arbitrage and distressed/special situation. We take a very cautious view on private investments as they tend to be illiquid and non-transparent. Needless to say our exposure to this area is minimal.
A comparison of Asian and global Eurekahedge performance indices shows that Asian hedge funds and funds of hedge funds have been generating superior risk-adjusted returns compared to their global counterparts. How do the Ajia funds fare in the same context, as well as when compared to targeted returns and volatility?
Our Asian fund outperformed both the Asian and Global indices last year by 49% and 2.75% on a relative basis. As of February 2007, the Eurekahedge Top 10 Table for Asia Pacific Multi-Strategy Fund of Funds ranked us #3 in terms of Sharpe Ratio only behind a China fund and an Asia ex-Japan fund. We are near the top end for our return target of 15% while below the target range of volatility of 5-7%.
As for our JPY denominated Japan fund, the performance was positive since launch in the 3Q of 2006. Given the relatively short track record, we’ll not compare it to any indices at this moment.
More specifically, how has your Japan-focused fund performed in 2006, a rough year for the Japanese markets? To put it in context, the Eurekahedge Japan Hedge Fund Index was down 3.7% for the year 2006.
The fund was flat as we were quite defensive in our positioning last year although we did scale up our risk budget for the last two months in 2006. As of February 2007, the fund was up 3.6% YTD against the Eurekahedge Japan Hedge Fund Index of 1.92%.
Would you agree that there is a growing trend among Asian fund of funds managers to pick ‘emerging’ hedge fund managers, especially given rigorous selection processes? Or is the track record of a hedge fund still an important factor in the selection decision?
Yes, but we think there are two camps within the Asian fund of funds space. There are specialist shops such as Ajia Partners and the US and European firms focusing mainly on global related strategies. Given our presence in Asia and local knowledge, we believe we are in a better position than our global peers to access these emerging managers often with US$50 million AuM or below. For billion dollar global funds of funds to invest 10% in a US$50 million manager, it doesn’t make economical sense for them, given the level of due diligence and manpower required.
Our screening process tends to focus less on track record and AuM for selection purpose. Having said that, we take into consideration the degree of drawdown, volatility and liquidity of hedge fund. This flexibility allows us to be ahead of the crowd, as we dramatically reduced our exposure to Japan at the beginning of 2006 and then increased our exposure when other funds were still reducing their exposure.
Which hedge fund strategies do you see assets primarily flowing into for the year ahead?
Everyone is talking about event-driven strategy given the hike of M&A activities around the world, especially in the US, Europe and Australia. There is certainly a lot of hot money from private equity to hedge funds in chasing these deals. We prefer to increase our weighting to markets and strategies that will be beneficial to the rise of volatility.
And finally, what is your near-term outlook for the underlying Asian markets that your funds allocate to?
There are markets that we favour in both the developed Asia and emerging Asia. We prefer markets that have low inflation and less dependent on export sectors given the current economical cycle. Since we expect Asia to be more volatile as a group, capital preservation is a theme that we incorporate for our funds.