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Hedge Funds Boost Loans to Small Companies in Asia

Date: Thursday, April 3, 2008
Author: Tomoko Yamazaki, Bloomberg

An increasing number of hedge fund managers in Asia are making loans to small companies as they search for more stable returns, according to the chairman of Singapore's hedge fund lobby.

As many as 25 percent of funds managing a combined $200 billion in Asia extended such loans last year, Peter Douglas, chairman of the Singapore chapter of Alternative Investment Management Association, said in an interview yesterday. That's up from less than 10 percent in 2006, he said.

A dearth of available credit from banks for small Asian companies has created a niche for funds, including Singapore- based EuroFin Asia and Hong Kong-based Cube Capital Group, which charge interest as high as 20 percent for short-term loans. The arrangements offer a way to stabilize returns for an industry roiled by the collapse in global equity and debt markets.

``This year will be a very big year for those credit-slash- special situation kinds of funds that get involved directly into providing liquidity,'' Douglas said. ``Hedge funds are much better suited to taking unusual risks because it's a small number of experienced people whose livelihood depends on making the right decisions.''

Returns for hedge funds lending to small companies may average about 10 percent to the ``low teens,'' said Douglas, who's also president of hedge fund consulting firm GFIA Pte.

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.

Demand for Credit

Market swings triggered by more than $230 billion of writedowns and credit losses at banks and securities firms since the start of 2007 have hurt hedge funds. The average fund fell 2.83 percent this year as of March 28, according to Chicago- based Hedge Fund Research Inc.'s Global Hedge Fund Index, which is updated daily with a two-day delay. If the decline holds, it would be the biggest quarterly drop since a 3.85 percent slide in the second quarter of 2002 for HFR's Weighted Composite Index.

Demand for credit is rising in a region that's home to the world's two fastest-growing major economies, China and India. The Asian economy, excluding Japan, may expand 7.6 percent this year, according to estimates yesterday from the Asian Development Bank in Manila.

Though there are no estimates for credit availability in the region, ``in most countries a majority of SMEs do not have access to loans from formal sources such as banks,'' said Nimal Fernando, practice leader for microfinance at the Asian Development Bank.

`Alpha' Investing

In China, where the economy grew 11.4 percent last year, the banking regulator urged companies on March 14 to ensure ``healthy'' growth in loans to small enterprises, even as the watchdog clamps down on overall lending.

Cube Capital, with $1.2 billion of assets, offers loans to Chinese real estate companies. The loans are usually for three to 12 months at interest rates of 10 percent to 20 percent, said founder Francois Buclez. They are typically secured by land or equity, he said.

``The environment isn't going to be as supportive as it's been, so you need to move towards alpha-creating strategies, and structured financing is definitely one of them,'' Buclez said in an interview.

Alpha refers to the premium an investment portfolio earns above a certain market benchmark such as the Standard & Poor's 500 Index in the U.S.


Christian Stauffer, founding partner of EuroFin Asia, a Singapore-based commodity finance hedge fund, said he invests in commodity producers and uses raw materials as collateral for making loans.

EuroFin's loans average $5 million to $7 million, with rates that are 2.5 percentage points to 5 percentage points higher than the London Interbank Offered Rate, depending on the size of the credit and what commodity backs up the loan, Stauffer said.

The firm's $70 million LH-Asian Trade Finance Fund, which has risen more than 10 percent since it opened in September 2006, has stakes in 12 Asian companies.

``We have seen recently a sizeable increase in the pipeline of deals,'' Stauffer said. ``I wouldn't be surprised if it keeps increasing in the near future, because there is a need.''

To contact the reporter on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net