The Asian Hedge Fund Industry: Top Ten 2008 Forecasts

Date: Wednesday, January 2, 2008
Author: Hedge Fund Hotel - Hawaii

"If thou art pained by any external thing, it is not this that disturbs thee, but thy own judgment about it. And it is in thy power to wipe out this judgment now."
Marcus Aurelius,
Roman Emperor (161-180 AD)

Here goes for this author's first and only take on big, broad themes and what to make of Asia's hedge fund industry heading throughout 2008. It goes without saying that it will be a challenging time for the prime brokerages of major investment banks (GS and MS take note) as competition intensifies:

Ten, Asia' s SWF (Sovereign Wealth Funds) take the global stage. This has already started involving China and Singapore. One might even see them taking stakes in global hedge funds or hedge fund of fund firms. Who would havde thouhgt that after the Asian Crisis less than 10 years ao that they are now regarded as the "white knights of Asia" and potential savors of poor managed U.S. investment banks. One wild conjecture I will make is that a US$10 billion hedge fund firm might also succumb to an Asian SWF strategic ownership. For instance, why shouldn't GIC/Temasek become the single biggest investor in a fund like Tudor or Caxton (not they it will...but why not)?

Nine, Asia Multi-Strategy Finally Wins Supporters. This year has seen a select few do very well across a number of markets and countries. For example, Artradis out of Singapore has been a notable performance winner after a period in which AUM stalled toegther with performance. Expect more of the same from other fund firms such as DKR Oasis or PMA. The trick is finding homes for all those billion of dollars to invest!

Eight, Asia ex Japan Overtakes Japan. This is no real surprise given the almost 24 months of "sickly" returns of Japan equity markets versus those of its neighbors. Expect more and more Japan Long/Short Equity managers to fall victim to "geographic drift" using Japan as a core market short position. This has been a successful strategy for may firms which might include Joho and Penta to name a couple.

Seven, The Rise of Asia's Institutional Investor. It is about time that insurance companies in Taiwan and Korea stepped up to the proverbial investment plate allocated to private equity and hedge fund of funds. Once this starts expect a number of other country institutional investors to follow.

This will be the year for the marketing departments of U.S. and European hedge fund of funds to step up hiring of "experts" who have contacts and good reputations to start to nurture the process. It is about to begin so get ready. We estimate that Japanese institutional investors in hedge funds amounted (in the good old days) to US$75 billion with about US$40 billion comprising the rest of Asia. This balance will soon change and fast!

Six, while Japan Financial Firms Stagnate, Pension Demand Grows. No real surprises here. The real issue is where will Japan's financial firm capital go - back into the falling yields of U.S. Treasuries???? How about real estate or infrastructure projects in Asia? They are not going to be willing CDO buyers as they were in 2005 and 2006.

Five, Pan Asian Long Short Equity Grows. Asia is still estimated to be a high growth region for AUM growth and numbers of managers (albeit small). For example. we estimate that Asia hedge fund and # funds were US$140 billion and 700 in 2006 and by the end of 2007 this had grown to US$170 billion and 850 firms. If one includes all hedge fund assets (including from global funds and across all strategies) then AUM in Asia might even hit the US$300 bln mark in 2008!

Four, Singapore Challenges Hong Kong and Sydney as Asia's Hedge Fund Center. This is inevitable as MAS and others in Singapore have taken a hands-on approach to regulation (little as possible) and taxation (little as possible) to encourage fund formation and activity. For example, once they get really active in the seeding business this should make Singapore an even clearer location choice for fledging and growting hedge fund firms. Or will it?

Three, Real Estate and Infrastructure Emerge as Hedge Fund Strategies. This is a positive theme that symbolizes the Globalization of the Consumer, especially in Asia. Look for countries like India and Vietnam to get on this bandwagon very fast. They already have.

Two, Retail Hedge Fund Strategies Emerge in Asia in Scale Courtesy of Traditional Hedge Fund Firms. I expect big firms like BGI, State Street and others to first attack the institutional market with so-called equity market neutral products (or quant funds). This is already happening and the big investors will allocate more, especially if downside risk to the region's equity markets continues to be a factor. China is a the obvious next target for these firms.

One. Location! Location! Location! Someone will soon come up with a clearer idea as to what motivates the regions' managers choosing one place rather than another to set up shop. In the same vein, long/short equity managers will also spend more time explaining their country allocation methodology to investors as a critical component of their alpha generation. Finally, as Asian corporations from China to India become more acquisitive on the world stage there may actually be more hedge fund managers established in London and New York/West Coast as emigres from these centers take a greater interest in their own markets. As ever, as long as demand exceeds supply of available float these markets will continue to suffer typical EM growth pains involving spasms of high returns and steep losses. Moreover, as these countries get "richer" they will become increasingly important as a source of high-growth institutional investors. There is still a whole lot of beta to get out of the region.

Last but not least, China will win a record number of gold medals (over 110) at the Beijing Olympics... Mahalo.