The Eurekahedge Asian Hedge Fund database contains data on over 1,5701 funds, based partly on which, we estimate 1,204 operational hedge funds in the Asian hedge fund industry, managing assets to the tune of US$171 billion, as at the end of July 2008. The industry has grown at a robust pace over recent years both in terms of assets as well as number of funds – assets have increased by over three and a half times, while the number of funds has more-than-doubled since December 2003.
As can be seen in Figure 1, this year (to-July) saw a decline of US$5 billion (3%) in assets across the industry. This, however, compares impressively against the Eurekahedge Asian Hedge Fund Index, which shed close to 10% over the same period. The marked difference can be explained by the healthy inflow of fresh capital (over US$10 billion) into Asian hedge funds, during the first seven months of the year.
The write-up that follows aims to analyse trends seen within the Asian hedge fund space both over recent years and during 2008 year-to-date. It comprises two broad sections – the current structure and structural trends within the industry (in terms of AuM, regional and strategic investment mandates, etc), and the performance of Asian hedge funds against that of funds in other regions and across different types of investment vehicles. The review also includes a short section on hedge fund service providers, pointing out the changes in market shares of the top ten administrators and prime brokers over recent years.
Current Structure and Structural Trends
Fund by Size
We shall start by looking at the current structure of the Asian hedge fund industry, and go on to review structural trends that have taken shape in the industry over recent years.
Figure 2 points towards the exponential growth in the Asian hedge fund industry over the last five years. The vertical axis shows the number of funds in each of the AuM ranges (horizontal axis) five years ago, compared with the present break-up.
While the number of funds in most AuM ranges has shown a healthy increase, the largest increase was recorded in funds with over US$100 million in assets (currently 374, compared to only 148 five years ago). This, coupled with only a modest increase in the number of funds with AuM of US$51-100 million leads us to believe that a large number of funds from this range have grown considerably in size over the 5-year period in question. However a portion of the increase in the higher AuM ranges was attributed to some large fund launches (with over US$500 million) during the period.
Apart from organic growth, the industry has also witnessed over 1,1002 fund launches during the last five years, the majority of which still have under US$50 million in assets. This goes some way in explaining the sharp increase (of 292) in the number of funds with AuM of under US$50 million.
Figure 2: Asian Hedge Funds by Size – Current and 5 Years Ago
In terms of regional mandates, Global managers currently account for the largest share of assets within the Asian hedge fund industry, with Asia inc Japan and Asia ex-Japan being a distant second and third respectively. However, it is worth noting that the market shares of these broad mandates have seen little change till the end of 2006, while those of mandates with a narrower focus – like China and India – have shown a healthy increase (refer to Figure 3). This suggests a shift of assets into funds with specialised regional mandates that have delivered good returns over recent years. Japanese allocations have seen a marked decline in market share over the last few years; regional equity markets performed poorly while other Asian markets exhibited a bullish trend, thereby prompting investors to reallocate to better performing regions.
The current year, however, saw quite the opposite trend, with assets shifting out of single-country focused managers back into broader mandates such as Global and Asia inc Japan. This largely reflects the fact that investors have aimed at diversifying their assets across more regions, in order to minimise risks associated with over-concentration in high-risk markets. The market share of China and India fell from 8.8% and 3.1% respectively as at December 2007, to 4.6% and 2.5% as at July 2008. Interestingly, Japan’s share rose marginally year-to-date. This can be explained by the relative outperformance of Japanese allocations, to those across other Asian markets; the Eurekahedge Japan Hedge Fund Index shed 5.6% for the year-to-July, while Asia ex-Japan as a whole was down over 13% for the period.
Figure 3: Change in the Geographical Mix of Asian Hedge Funds (by AuM)
Figure 4 illustrates the changes in assets, seen across the industry over the past few years, in terms of strategic mandates. It must be noted before further analysis, that the rest (blank space) of the 100% in each year represents the share of long/short equity managers.
A quick glance at the chart points towards a healthy increase in the share of long/short managers post 2002, followed by a marked fall after 2006. The increase post 2002 can be attributed to the healthy performance of Asian equity markets, which increased the demand for regional funds of the strategy; the Eurekahedge Asian Long/Short Equities Hedge Fund Index recorded double-digit gains right from 2003 up to 2007.
The decline in market share post 2006, to a great extent, is due to the persistent volatility and steep declines seen across most equity markets after the meltdown of the US subprime mortgage markets around mid-2007. Furthermore, weakness in the financial sector and rallying commodity prices throughout the first half of this year, also took a toll on most equity markets across the board; some (such as Hong Kong, China and India) in Asia shed close to or well over 25% for the year-to-July. This is also reflected in the performance of Asian long/short managers, who lost nearly 11.5% in the first seven months of 2008.
Figure 4: Change in the Strategic Mix of Asian Hedge Funds (by AuM)
CTAs saw a sharp increase in market share in 2003, owing to both new launches and strong inflows into the strategy during that time. This increase is also mirrored by the fact that CTA was the best performing strategy (21.3%)3 in 2002, and also recorded healthy returns through 2003 (16.4%). The decrease in their share post 2003 can be attributed to some outflows out of CTA funds on the back of subdued returns for the next few years. 2008 year-to-date, however, has been impressive for CTAs across the board, who have largely benefited from commodity and currency trends – marked increases in the prices of energy, metals, grains and softs, coupled with sharp depreciation in the US dollar against most major currencies (3.8% and 7.6% against the yen and the Australian dollar respectively). Impressive performance, coupled with a shift of assets (and fresh inflows) into the strategy explains the 2% increase in market share for Asian CTAs.
Event-driven managers have also seen a sizeable increase in their market share – from 7% as at the end of 2005 to a healthy 13% as at July 2008. Managers of the strategy have been witness to rather attractive inflows over recent years, given their marked returns on the back of strong M&A activity within the Asia-Pacific region; the US$11.1 billion deal between Vodafone Group Plc and Hutchison Essar (India), in 2007, is a case in point.
Some other strategies like fixed income and macro, which make up relatively small portions of the pie, also saw some increase in their respective market shares over the past few years. While some of this increase can be ascribed to positive returns, new fund launches and some inflow of capital into funds employing these strategies, some attribution can also be made to the notable decline in the share of long/short managers, which in turn shoots up the market share of other strategies being analysed.
While Figure 5 compares the current market shares of the top ten manager locations, in terms of the number of funds managed from each of the countries, Figure 6 illustrates the change in the market shares of the top six manager locations since end of 2002. This analysis is done by comparing the number of funds rather than the AuM, in order to understand the structural changes within the hedge fund industry, irrespective of the performance of managers and flow of assets across hedge funds – both of which impact the AuM.
As evident in Figure 5, the UK accounts for the largest portion of the pie, while Hong Kong and the US take up second and third positions respectively. However, Figure 6 shows that the US had been second to the UK until mid-2006, after which it was surpassed by Hong Kong’s share, which saw consistent increase thereafter. This is partly due to the fact that a number of managers have been setting up offices in Asia over recent years in order to be located close to some of the Asian emerging markets with high return generating potential (such as China and India, for instance). Likewise, Singapore has also seen a steady increase in its market share over the last seven years. Factors like hedge fund-friendly regulations and tax structures, among other things, prevalent within the island-country also make it an attractive and economically feasible bet for many a manager.
Figure 6: Change in the Manager Location-mix of Asian Hedge Funds
(by Number of Funds)
This section aims to highlight the changing trend in the market shares4 of service providers within the Asian hedge fund space. A yearly comparison reveals that while the shares of most administrators (by assets under administration) have remained more or less unchanged between 2002 and July 2008 (despite some sharp changes around the middle of the period), those of HSBC and Goldman Sachs have changed considerably. The former saw a sharp increase of 9% in its share, partly owing to its takeover of Bank of Bermuda, among several other factors, while that of the latter fell by 7% during the period.
Another interesting finding from Figure 7 is that all other administrators (apart from the top ten) administered over 36% of the total assets as at end 2002. However, their share in course of the last five and a half years under consideration fell by over 10%, currently standing at a mere 22.2%.
Figure 7: Change in the Mix of Administrators for Asian Hedge Funds
What follows, is a similar comparison of the market shares of the top ten prime brokers across the Asian hedge fund space. Morgan Stanley and Goldman Sachs were among those to have seen a significant fall in their market share, while others like UBS, Deutsche Bank and Credit Suisse saw healthy increases in their shares. This can be explained by an increase in their presence across Asia over the past few years.
Figure 8: Change in the Mix of Prime Brokers for Asian Hedge Funds
While all of the above was a discussion of the current structure and changing structural trends in the Asian hedge fund industry, what follows is an overview of hedge fund performance. In this section we compare performance across different geographical and strategic mandates employed by Asian hedge fund managers, and also look at how Asian hedge funds fared compared to other types investment vehicles, and versus managers investing across other regions.
Table 1: 2008 YT-July Returns of Asian Hedge Funds, by Region and Strategy
We mentioned earlier in this report that investors have reallocated assets from single-country focused managers to broader geographical mandates, in order to minimise risks (or losses) arising out of over-concentration into one or relatively fewer markets. With reference to that, Table 1 clearly shows that globally-investing funds have indeed generated the best, or the least negative returns year-to-date. However, managers allocating to regions that performed impressively over the last few years up to 2007 (such as Greater China and India, for instance), suffered the worst losses this year. This is partly because equities in both the aforementioned regions saw losses in excess of 20% for year-to-July.
The table also shows the average strategy-wise returns for 2008 year-to-date. Not surprisingly, long/short equity managers lost 10.6%, given the sharp downturns across regional equity markets. CTAs, on the other hand, gained a healthy 6.9%, having benefited from directional trends across the commodity and currency markets during the period. Most other strategies were also flat to negative, as high volatility across asset classes, coupled with heightened inflationary pressures and concerns on the slowing of economic growth, negatively impacted the performance of managers across the region.
Table 2 which shows the year-to-July returns of Asian hedge funds by manager locations, also highlights some interesting facts – such as, CTAs managed from Hong Kong have returned a solid 21% for the seven months, while those managed from Singapore have lost 1.2% over the same period. Likewise, macro funds managed from Hong Kong have returned an impressive 11.7% while those managed from Singapore are down 3.6% for the period in question.
Table 2: 2008 YT-July Returns of Asian Hedge Funds, by Manager Location and Strategy
While Asian managers have had a relatively rough spell during the first seven months of the year, their 36-month returns up to July 2008 compare quite well against those of their global peers. In fact, Asian managers have recorded the best returns over the last three years (11.52% annualised), with their Latin American counterparts being a close second (11.45% annualised). It must be noted, though, that we have only taken the performance data of offshore Latin American managers into consideration, in order to eliminate any skewness resulting from the sharp appreciation in Latin American currencies during the past few years. Both North American and European managers have recorded annualised returns of under 10% over the same period.
We have also compared the Sharpe ratios of managers in order to analyse the risk-adjusted returns realised by hedge funds in each region. This analysis illustrates that while Asian hedge funds have realised the best returns over the past years, they have seen the lowest returns relative to their volatility over the period (Sharpe ratio 0.52).
Figure 9: 36-month Risk-adjusted Returns across Regions
Similar to the region-wise comparison made above, we have also plotted the performance of Asian hedge funds against other types of Asia-focused investment vehicles – namely, Asian long-only absolute return funds and Asian funds of hedge funds. In this case, Asian hedge funds stand out both in terms of absolute returns (11.5%) as well as risk-adjusted returns (Sharpe ratio of 0.5); their long-only counterparts return an annualised 9.8%, with a 36-month Sharpe ratio of 0.5. The lower returns of long-only managers can be explained by the fact that they generally provide higher beta, which results in far lower returns in a falling market; the MSCI All Countries Asia Index has shed 16.1% for the year-to-July, thereby bringing down their 36-month returns drastically. A significantly lower Sharpe ratio of long-only managers can be attributed to the high volatility across the underlying markets over the recent past, which resulted in high volatility in their returns during the period.
Funds of funds have recorded the lowest 36-month returns on an annualised basis (7.2%), which can be attributed to several factors. For one, many funds of funds invest in large hedge funds, many of which tend to underperform their smaller-sized counterparts, owing to lower flexibility (due to their large size) to adjust their positions during times of volatility in the underlying markets. Also, the fees charged by funds of funds (which also include the fees charged by the hedge funds they invest in) make up a larger portion of their returns than in the case of hedge funds or long-only absolute return funds. And lastly, mixed returns across hedge funds particularly over the past one year have taken a toll on the performance of funds of funds too, bringing down their performance significantly.
Figure 10: 36-month Risk-adjusted Returns across Investment Vehicles
Asian hedge funds, after having outperformed the average hedge fund in 2006 and 2007, shed 10.5% for the first seven months of 2008. The MSCI AC Asia Pacific Index lost 16.1%, as equities across the entire region saw sharp declines amid heightened inflationary pressures, record crude oil prices and concerns on the slowing of economic growth across the board.
In August, while some equity markets like those in Australia, Taiwan and India returned between 1.2% and 3.2% for the month, those in Hong Kong, Japan and China lost between 3.8% and 13.8% (amid news of further distress among some large financial firms in the US, coupled with mixed earnings results for companies in the region).
We remain fairly optimistic about the performance of Asian hedge funds for the rest of this year and beyond, based on several factors. Firstly, attractive valuations (yet fairly strong fundamentals) across regional stock markets after the recent downturns, afford managers with profitable long-term investment opportunities. Secondly, we expect that the current market volatility may work in favour of managers employing short-term trading strategies, and any further downside across equities to translate into some gains for long/short managers on the short side (given their cautious near-term outlook).
And lastly, developments across some of the emerging Asian markets (such as the re-allowance of investors to go short in the cash market in India, for instance), offer managers with more room to employ different trading strategies in order to maximise returns. Not only do we expect these factors to play an important role in helping managers achieve good returns over the medium term, we also see them playing a part in attracting new capital into the Asian hedge fund space over time to come.
1Including 351 obsolete funds and 155 long-only absolute return funds.
2Including currently operational funds as well as obsolete funds.
3 Returns of the global Eurekahedge CTA/Managed Futures Hedge Fund Index, since most managers of the strategy employ a global geographical mandate.
4Market shares are based entirely on funds listed in the Eurekahedge databases and are only a rough indicator of actual industry breakdown.