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Asia hedge funds face another rough ride in 2009

Date: Wednesday, January 14, 2009
Author: Saeed Azhar and Tony Munroe, Forbes.com

Hedge funds in Asia face more pain this year as shell-shocked investors shun risk and financial markets remain volatile, hobbling newcomers and forcing some laggard funds to close.

Asia-focused funds suffered their worst ever year in 2008, underperforming their peers in the West, as markets cratered and investors demanded their money back.

This year will be marked by consolidation around more established players and a more conservative approach to using debt to drive investment returns. Investors will also insist on greater transparency and closer attention from fund managers.

"Until investors alter their strategies, which presently revolve around asset protection and maintaining their liquidity, and begin looking at the opportunities, there will be further pain, especially in the first quarter," said David Gray, who heads UBS' prime brokerage services in Asia-Pacific.

Only a quarter of 1,150 Asia-focused hedge funds made money last year compared with 38 percent of global hedge funds in the first 11 months of the year, according to Eurekahedge.

As investors fled tumbling markets and cashed out, assets at the end of the third quarter fell to $87 billion, data from Chicago-based Hedge Fund Research showed, worse than the 11 percent drop in assets at global funds.

While Asia's fund industry has not seen high-profile blowups like the U.S. and Europe, largely because it has not taken on as much debt or risk, plenty of smaller players in the region have quietly shut. Eurekahedge estimates 100 Asia funds folded in the first 10 months of 2008 and industry players say more will close.

"We've had quite a significant amount of redemptions across the industry in Asia in '08. That, from all accounts, will carry through into '09, certainly in the first half," said Farhat Malik, chief executive of PMA Capital Management, a Hong Kong-based unit of Japan's Sparx Group that runs about $2 billion in hedge funds.

Peter Douglas, founder of hedge fund consultancy GFIA, said investors will only commit fresh funds after examining the performance of specific hedge funds in 2008, when the credit crisis exploded into global financial turmoil that helped push much of the world into recession.

"We had a decade's worth of data points in one year, in terms of risk management, investment discipline, business ethics and organisational strength," he said.

Global giants, meanwhile, have been retreating from Asia.

GSO Capital Partners LP, U.S. private equity firm Blackstone Group's $25 billion credit hedge fund, is shutting its Asia investment desk after failing to find attractive investments, sources familiar with the situation said on Tuesday.


Funds which have closed include the Melchior Japan Fund run by Dalton Strategic Partnership and The APAC Greater China Fund, which at its peak managed $55 million. In Singapore, Tantallon Capital liquidated one of its funds, which managed $18 million.

Hedge fund managers typically earn the bulk of their fees by topping previous highs -- levels that will be hard to reach after 2008's dismal performance, which may prompt more fund closures.

"The water mark is so high that some funds will have to work a couple of years before they achieve those levels again and so they may believe it is better to start over," said UBS' Gray.

With investors feeling less than adventurous, new funds will have a hard time gaining traction, and those that manage to launch will be forced start with less money. Asia startups almost halved in 2008 from 157 in 2007, Eurekahedge data shows.

Proven managers have more pulling power these days.

Singapore-based Artradis Fund Management, a $4.5 billion operator, saw its multi-strategy AB2 fund gain 34.7 percent in 2008 while its flagship Barracuda fund rose almost 27 percent, industry sources said. That success enabled it to launch a $200 million convertible bond fund in October.

While a bull market can breed laxity, fund managers and investors tend to be more rigorous when times are tough. Industry players said transparency and frequent communication between managers and investors were at a premium.

The alleged $50 billion fraud by New York money manager Bernard Madoff underscores the need for investor vigilance.

"Fullerton Fund Management will be stepping up the intensity of our already thorough due diligence process," said Shirin Ismail, head of absolute return investment strategies at Fullerton, a fund manager owned by Singapore state investor Temasek Holdings

She said the focus for 2009 will be on liquid trading strategies with transparent price action, while Fullerton is also evaluating strategies to take advantage of credit market turmoil.

PMA's Malik said managers who offer a range of products will have better odds of success. He also said investors will focus on overall operations at fund firms, not just the actual managers.

"In Asia, historically, the way a lot of the funds were sold was you had a very good investment team and then you didn't really focus that much on the platform itself; you outsourced as much as you could to prime brokers or other entities," he said.

That infrastructure-light approach made it easier for startups during the boom times but may be a harder sell for more discerning investors. It also makes barriers higher for startups.

"Investors are going to be very, very focused on the back office, the middle office, risk control and legal compliance," Malik said. (Additional reporting by Kevin Lim; Editing by Kim Coghill)