Asian returns belie the global recession

Date: Monday, July 27, 2009
Author: Ellen Kelleher, Financial Times

Hedge funds investing in Asia now appear to be one of the most popular alternative asset classes among the wealthy, with assets under management in the region expected to rise from $14bn in 2001 to $160bn by the end of the year, according to managers.

The flight to the region has been fuelled by robust returns this year – since the start of January, the index measuring hedge funds’ returns from Asia, excluding Japan, is up 17.56 per cent compared with just a 3 per cent return from the S&P 500, according to Hedge Fund Research, a US market research group.

The recession has not been felt to the same extent in Shanghai and Taipei as it has in New York and London. Asian economies are eking out subdued growth – helped by banks with stable loan books, low interest rates and sustained demand for goods from local consumers.

In the past three years, hedge fund strategies in Asia have widened beyond standard equity long-short plays to sophisticated arbitrage involving bets on interest rates and foreign exchange. Convertible bonds and private financing arrangements have also been popular.

More than 150 of the 1,100 or so Asian hedge funds now focus on China alone – about the same number as those focusing only on Japan – which suggests managers have become more bullish on China’s improving liquidity. The country’s plan to internationalise the renminbi and reduce its dependence on the US dollar is likely to increase its appeal further.

This month, Beijing announced a pilot programme that expanded renminbi settlement agreements between Hong Kong and five major trading cities. The full programme could lead to nearly $2,000bn in annual trade flows, or as much as 50 per cent of China’s total, being settled in renminbi each year by 2012, compared with less than 10 per cent today.

But investing in China is not without risks. “The ability to short there on investments beyond the H-shares listed in Hong Kong is few and far between – it’s quite difficult to hedge bets,” claims Henry Lee, head of hedge fund advisory with HSBC’s private bank.

But while Japan’s performance remains disappointing in comparison, the top decile of hedge funds invested there is still offering attractive returns, reports Edward Cartwright, head of business development with LGT Capital Partners, a fund of funds manager. Rupert Foster, an Asian fund manager with Matrix Alternative Asset Management, claims achieving compound returns of 10- 15 per cent over five years from investing in Japan is possible.

“Some funds are now doing well there and I think if you write off Japan, you do it at your own peril,” Cartwright says.

This week, hedge fund managers forecast that a wave of investor cash would flow into the industry in the coming months after evidence of the best quarterly performance by many funds in a decade.

Total assets under management by the world’s hedge funds rose more than $142bn in the second quarter of 2009, reflecting the strong performance of the industry as a whole, according to Hedge Fund Research.

Outflows from clients slowed to $42bn, from a peak of $152bn in the quarter following last September’s collapse of Lehman Brothers.