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Asian hedge funds in transition

Date: Monday, December 10, 2012
Author: David Walker, Investment Europe

IMQubator's Eliza Lau highlights the improvements taking place in Asia's hedge fund industry.

Some large European investors are increasing interest in hedge funds in Asia, and advisers based there are recommending not to journey there with outdated preconceptions. One European allocator that does not have an old picture of Asia’s industry is IMQubator, the global seeding platform backed by APG, the asset manager for Dutch pension Stichting Pensioenfonds.

IMQubator signed a mutual advisory relationship this year with Synergy Fund Management, an investment manager and adviser based in Hong Kong and founded by Eliza Lau, former CEO and CIO of SAIL Advisors in Hong Kong, and a veteran investor in Asian hedge funds.

“Asia has a strongly developing hedge fund market and lots of potential in the coming year as volatility is likely to go higher across the globe,” Lau says. “We see a broad spectrum of hedge fund strategies with Asian emerging manager candidates.”

The stereotype of Asian hedge managers being wholly and permanently long-biased is misplaced.

“The Asia Pacific industry can participate in relative-value, and multi-strategy, and event-driven, and convertibles and credit,” Lau notes. Synergy has invested in Asian agricultural funds, for example.

Funds blossoming

Lau notes the number of funds available in Asia has blossomed at least four-fold, from around 300 names before 2003. Strategies pursued have also broadened.

Database Hedge Fund Research noted that Asia’s industry, with 1,128 funds running $84.3bn, is larger than ever before. Korean funds made 7.6% last quarter as the KOSPI share index advanced, but in Japan – long considered a graveyard for hedge funds – managers made 1.7% in defiance of the Nikkei 225 falling 1.5%. Chinese funds also rose as their share market fell steeply. Indian funds made over 12% last quarter, the best quarterly figure since 2009’s second quarter.

Lau adds: “The landscape here has changed. There is great opportunity to invest in Asian hedge funds. Compared to the markets in Europe and the US, there are economies with decent growth, and the market still has decent volatility, which helps managers make returns.

“Asia, and in particular China, has underperformed this year, and many investors I talk to reduced China, or cut it if not shorted it, so their holdings in China are minimal. As we are seeing more positive notes coming out from China, along with the new administration and leadership coming on board, the currently undervalued China markets may have found supporting ground and I foresee a good turnaround coming.”

She welcomes moves by South Korea’s authorities to encourage a home-grown hedge fund industry.

“I am pleased to see regulation [in South Korea] is being revised to encourage new hedge funds to set up, homegrown asset management and brokerage houses to establish hedge funds domestically. This is positive news for the fund management houses and for investors, too.”

Lau says authorities have demonstrated commitment to the cause by their decision to halve minimum capital requirements for brokerage houses to launch funds, to KRW500bn, increasing leverage limits to four times NAV, and making allowance for high net worth individuals investing in hedge funds.

But she adds authorities will still have to work to attract South Korean talents to establish funds in Korea, rather than in Hong Kong or Singapore.

At Synergy, Lau is invested in South Korea through a hedge fund based in Singapore, mainly because of the manager’s edge and fund performance.

“The smaller and niche managers will tend to go extra miles to deliver good performance, thus they prefer markets like Hong Kong and Singapore.”

She says some managers may also select to set up in Hong Kong for its proximity to many large allocators. Korean managers basing themselves in Korea will, of course, be closer to Korean fund buyers, but appetite among this group is not yet substantial.

There is also the possibility, she notes, of managers locating researchers and their funds in South Korea, while basing the management/adviser in Singapore.