Investors told to brace for more blowups

Date: Friday, August 3, 2007
Author: Jeffrey Hodgson & Saeed Azhar, Thestandard.com.hk

Asia Pacific investors should prepare themselves for further fund blowups after Macquarie Bank became the third Australian money manager in less than a month to warn of heavy losses on bad bets from credit markets.

And odds are good that the next victim will once again surface in Australia, whose more developed hedge fund industry is also more exposed to the global credit market squeeze than its Asia Pacific peers.

The combination of volatile markets, a rush by investors to cash out and the inability to sell portfolios of complex, debt-linked instruments may cause other funds in the region to freeze redemptions, or fail outright.

"I do know that there's likely to be more out there. We're seeing some other managers, some of the funds, getting into similar issues," said Scott Lothian, head of manager research for Asia ex-Japan at investment consultant Watson Wyatt Worldwide. "It's really hard to get visibility at the moment on how far it's going to spread."

Macquarie warned on Wednesday that two funds investing in securitized loans could lose up to a quarter of their value, or more than A$300 million (HK$2 billion). While the funds had assets of just over A$200 million, their investment value was magnified by gearing of more than six times.

The warning followed the suspension of withdrawals last month by two Australian hedge funds, Basis Capital and Absolute Capital, as managers try to avoid a fire sale of assets. Both funds were caught out by volatility in the market for collateralized debt obligations.

"What it really comes down to is where the most leveraged vehicles are. And that's what appears to have happened in Australia, where you've got funds with high levels of gearing finding it difficult to maintain that gearing," said Mark White, a director with fund of hedge fund manager KGR Capital.

"I'm sure there are some other geared vehicles around which may have to take similar steps if their bankers get worried about their margin."

White said he would be surprised if similar problems hit funds in other Asia Pacific countries. He noted debt and credit markets, and the hedge funds that invest in them, are far less developed elsewhere in the region, meaning there are few funds to run into problems.

According to funds consultancy Eurekahedge, 70 percent of the US$35 billion (HK$273 billion) in assets managed by Australian-based hedge funds is invested on a global basis.

By comparison, it said less than 30 percent of the US$52 billion in assets managed by hedge funds based in other Asia Pacific markets is invested in global markets. The bulk of funds are instead invested locally or regionally.

While most Asia Pacific hedge funds may have no direct exposure to US credit market woes, investors still need to be cautious because the funds could still come under pressure in a "cross asset negative sentiment spiral," said Jay Moghe, managing director at Opes Prime Asset Management in Singapore. "Macquarie's case shows that it is really sentiment-driven. Risk has suddenly reappeared, manifested by plunging stocks of banks connected to debt, but not necessarily to subprime, and affected by volatility soaring." REUTERS