AsiaHedge Forum 2007

Asia-Pacific funds face the challenge of the mainstream

As the effects of the sub-prime crisis ripple out around the globe, the debate at this year's Forum focused on the need for the industry to deliver returns in an increasingly volatile environment
Given that the theme of the 2007 AsiaHedge Forum was 'Going Mainstream', it is no surprise that institutionalisation was a recurring theme throughout the two-day event, which packed in a host of top-notch speakers and stimulated hours of debate.
The Forum kicked off with a session on alpha, which posed key questions such as why so many Asia-Pacific hedge funds are struggling to match beta, whether or not that is a sustainable state of affairs and where the search for alpha goes from here.
To discuss these topics, moderator Peter Fletcher of Parly Company SA drew on the insights of panellists from Asia Alternative Asset Partners, Drake Management, Fullerton Fund Management Company and Gandhara Capital.

The AsiaHedge Forum 2007 focused on key questions of alpha, macro and China

The region will continue to provide plenty of opportunities for smart, nimble hedge funds, said Gandhara's Davide Erro. Both China and Japan continue to excite, the former because of its strong liquidity and booming economy, and the latter on an individual company by company basis.

Triple A Partners' Paul Smith cautioned that the impact of the sub-prime crisis in the US is still unfolding, and more bad news can be expected from Asian companies with exposure to sub-prime structured products gone bad. He also noted that hedge funds do not have a proprietary grip on alpha and have faced stiff competition from long-only managers over the past couple of years.
Fullerton's Shirin Ismail highlighted a point that was to recur throughout the sessions of the Forum – managers need to prove themselves in terms of volatility, not just performance. They will also come under increasing scrutiny as business managers, asset managers and investors pay greater attention to how they handle liquidity and management, said Drake's Richard Horodeck.
Is the de-coupling of Asia from the rest of the developed world really happening? This was one of the main questions the session on macro set out to address. AsiaHedge editor Paul Storey posed this question to panellists from Ballingal Investment Advisors, Bridport Investor Services, First Horse Capital and GaveKal.
First Horse's Ajay Kapur kicked off with his view that there cannot be any meaningful decoupling of global financial markets, although he was more sympathetic to the concept of economic decoupling due to the growth in domestic demand in China, India and Indonesia. But he added that genuine decoupling cannot happen when currencies are manipulated or in the absence of social security, which engenders a save-not-spend mentality.
Ballingal's Geoffrey Barker pointed out that any conversation about decoupling in Asia had to take into account the extent of a possible recession in the US, because Asia has not yet moved away from its mercantilist approach. Part of the impetus for decoupling comes from demographic changes within Asian countries, particularly China, noted GaveKal's Pierre Gave. Factory workers who own their own homes and have a regular income have a very different attitude to consumption compared with peasants, he said. Whether or not this is the moment when Asia can be said to be truly decoupling, the panellists all seemed to agree on one point – that a big structural shift is under way, as the nexus of economic might shifts from west to east.
The first day's keynote address brought together SPARX Group founder Shuhei Abe and PMA's Farhat Malik. Neil Wilson, editorial director of HedgeFund Intelligence, noted that the purchase of Hong Kong-headquartered PMA by Japan's SPARX Group in 2006 created something unique in the Asian hedge fund industry – a homegrown, major institution with combined assets of over $15 billion.

Abe explained how, in 1989, youth and naiveté led him to believe he could break from Japan's institutional stranglehold on asset management and set up an independent operation. He acknowledged a debt of gratitude to one of his first employers, George Soros, who taught him about value investing and hedging and predicted the bursting of the Japan bubble.
The first hedge fund in Asia to be publicly listed, SPARX has been brought face to face with the true meaning of random movements of stock prices, said Abe. Now an institution in its own right, SPARX has become a one-stop shop for long-only, long/short equity, activist, credit and Asian macro investing, with an institutional platform to match.
Malik also took up the theme of institutionalisation and described how PMA had been established with a strong institutional framework from the outset. Key to this was investor choice across a range of strategies, as was a clear focus on institutional investors with a selective approach to pursuing leads to identify clients who want to grow together with PMA. The other pillar of success was the management of the business itself – operational excellence and efficiency, a stable team and strong compliance and risk control.
The combined business now has both Japan and Asia ex-Japan funds. Malik highlighted the complementary skill sets of the two houses as well as a similar approach to research, compliance and transparency. The lesson for other hedge fund managers, both agreed, was the imperative of institutionalisation, even for boutique managers if they hope to attract institutional investors.
The first morning culminated in the event-driven session, with four Asia-Pacific and Greater China specialists from Abax Global Capital, APAC Capital Advisors, Fundamental Capital Management and TT International, moderated by Christophe Lee of SHK Fund Management.
Given that event-driven strategies sometimes take an activist approach, one question was how this might play out in Asia, a region typically known for its aversion to direct confrontation.
TT's Jeremy Ip described how some activist shareholders have taken high-profile positions in Asia and failed to achieve their original goals because they did not acknowledge the significant cultural, legal and regulatory differences between Asia and the west. In the Asian context, event-driven is about working with management and exchanging views on how to improve the balance sheet, concurred Fundamental's Michael Lien.
Abax's Chris Hsu pointed out Chinese non-public or recently listed smaller and medium-sized enterprises as an exciting area for event-driven managers, as this is somewhere that managers can maintain an edge. For APAC's Ken Lu, the biggest event still playing out was the proposal to allow through-train investment in Hong Kong stocks by domestic Chinese investors.
China was brought up throughout the Forum in various contexts, but had a session to itself too. Moderated by Harvey Twomey of Merrill Lynch, the session brought together four diverse professionals with experience in long-only, long/short and distressed debt fund management in China. Asked where they saw China going from here, Alan Gibbs of JO Hambro Investment Management noted that some of the easy ground has already been covered with the substantial rise in H shares, so investors need to look to other ways to benefit from growth in China.

That growth can be expected to continue, said Cape Asset Management's Charles Lo, who has seen China so far understating its wealth, but he cautioned that the extent of the anticipated slowdown in the US was an important factor for China. Social stability is another concern, he said, especially if there were a crash in the A share market.
Cube's François Buclez agreed on the importance of social stability, as an increasing number of companies turn away from their core business to play the domestic stock market, while Marco Polo's Aaron Boesky was very upbeat about China's prospects, in part because of the massive amount of fixed asset investment over the past few years and the domestic consumption story, which he believes is only starting to gain pace.
India was also put in the spotlight in a session moderated by Citi Investment Research's Ratnesh Kumar and panellists from Halbis, Reliance Asset Management, Sandstone Capital and Stratton Street Capital.

While the long-term growth story was undisputed by panellists, Sandstone's Paresh Patel asked whether India has room for hedge fund managers. His view is that, yes, there is scope for long/short equity managers in India, despite the limitations on shorting opportunities at present and the strength of the equity market.
Growth drivers in the Indian market remain the same, according to Pankaj Nagrath of Reliance. These include a growing economy and overall improvements in balance sheet profitability. Meanwhile, Stratton Street's Andrew Main was happy to note improvements in corporate governance over the past decade. However, Halbis's Sanjiv Duggal cautioned against getting too euphoric about the country, which is as prone to troughs as it is to peaks.
Short selling has traditionally been seen as expensive or difficult in Asia and indeed is not allowed in some markets. The veracity of the view and its implications for the Asia-Pacific hedge fund industry were covered in a dedicated session.
Data on short-selling in Asia is not usually easy to come by, but Data Explorers' Will Duff Gordon was able to provide a breakdown of stock lending volume by country. The region accounts for $400 billion of stock on loan out of a global total of $3 trillion, a modest proportion compared with 35% for the US. Enhanced Investment Products' Toby Bland commented that there is still a general acceptance in Asia that shorting is a defensive, rather than offensive, strategy.
Forum delegates had a choice of two sessions to round off the day. In the frontier markets session, moderated by AsiaHedge deputy editor Aradhna Dayal, liquidity was a hot issue. Kevin Snowball of PXP Asset management, which invests in Vietnam, noted that liquidity is a relative concept. In Vietnam, market turnover has gone from $100,000 in 2003 to $60 million now, and most market players are local or from dedicated Vietnam funds.
Hunter Investments' Jeep Chatikavanij explained that in Thailand liquidity in small- and mid-caps is a function of price – the lower the price the more illiquid the shares become, so there is nowhere to hide when reacting to liquidity-driven events.
Meanwhile, David Foubard of SGAM Alternative Investments tackled the issue of beyond beta – the need for added value, covering topics such as what investors should expect from hedge funds in Asia in the areas of performance, non-correlation and diversification. He also explained the significance of concepts that are relatively new to Asian hedge funds, including portable alpha, core versus satellite exposure and liability-driven investing.
The second day of the Forum started with a session on investors. Moderator Theo Splinter of Citco Fund Services was keen to draw panellists on the implications of big investors looking at Asian hedge funds.
Once again, the drive towards institutionalisation came up. KBC Alpha Asset Management's David Walter expects the attrition rate for funds to increase as the break-even point continues to rise. 3A Asia's Jennifer Carver observed the growing presence of funds of funds in the region, which will promote the middle tier of fund managers. The view of Contango Asset Management's David Stevens was that investors will go wherever the returns are, regardless of where they are based.
Start-ups got their turn on the stage in a session moderated by HSBC's Jonathan Field. He asked panellists, all safely through the start-up phase themselves, what they had learned from the experience.

Jean-Christophe Blanc of CQS said that at the outset the choice of service providers was one of the most difficult decisions. Quant Asset Management's Frank Holle would have spent less time pursuing investors at the outset, focusing purely on generating performance, while Australian Fund Monitors' Chris Gosselin said the particular challenge for him and his compatriots was geographical distance from pools of investment.
Philip Tye of Dragonback Capital picked up on the theme of the Forum, saying that the region's hedge funds are attracting more institutional investor interest as they become more mainstream, and as such will be held up to standards used to judge global businesses. 
Start-ups generally require a lot more resources at the outset than they did a few years ago, and so it was with some degree of nostalgia that Forum participants listened to keynote speaker Johnny Boyer describe how he and Nick Allan set up Boyer Allan Investment Management in 1998.
The firm began from a small office with dodgy central heating and the pair embarked on an eight-city roadshow that just preceded the Russian debt crisis, the collapse of Long-Term Capital Management and a yen meltdown. Boyer recalled how a Swiss investor burst out laughing when he said he was launching an Asian hedge fund. Less than a decade down the line, Boyer Allan has a stable of five successful Asian hedge funds with around $2 billion in assets under management.
The effect on Asian credit of the collapse of the US sub-prime market was addressed in a session on credit, in which panellists held differing views. The view of Brooke Capital's Jonathan Brooke was that Asian bank exposure to sub-prime is unevenly distributed and he did not see signs of a problem serious enough to derail interest in the Asian credit cycle.
Tempus Investment Research's John Schofield saw last August's sell-off as a defining moment in terms of investor behaviour, which reconfirmed the basic thesis of a powerful secular bull market driven by China, India and other emerging markets. However, WERU Asset Management's Hidemichi Watanabe was less optimistic, as was Angus Cameron of Komodo Capital Management, who said that the full extent of the sub-prime fallout has yet to be seen.
In the last session of the Forum, a debate on strategies, panellists were asked how they would invest $100 million with the aim of capital preservation and optimum returns, StoneWater Capital's Frank Brochin said he would put the money in small- and mid-cap India, as well as Hong Kong companies that serve China and Korea, still one of the cheapest markets in Asia. Stretto Capital's Raymond Kong said he would focus on capital preservation and stick with Chinese market leaders that could play the domestic consumption theme. George Philips of RAB Capital said he was awaiting Asian volatility with open arms and would invest to exploit cheap optionality.
As a Japan equity manager, Oberon Asset Management's Nick Mann lamented that, of the five panellists, he had the toughest task right now to make money, while Justin Ferrier of Myo Capital concurred that caution was the key for distressed debt in the coming year.
By the close of business it was clear that the challenge of going mainstream was indeed at the forefront of the hedge funds debate for panellists and Forum delegates alike. But the Forum also brought out many other hot topics, most notably Asia's purported decoupling from the West, the impact of the sub-prime crisis in the US and, above all, how to make money in this diverse, exciting and fast-growing region.