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May 25, 2006
Market drop a test for Asia's hedge fund sector
This month's sell off in Asian markets will shake out the region's weaker hedge fund managers, but rich trading opportunities should ensure the sector's growth for years to come, industry experts said on Thursday.
Fund of fund managers, who invest millions with hedge funds on behalf of pension funds and other large players, said the volatility will ultimately benefit the best managers.
"It's a good test for managers here. If you look at the past four to six months, markets have just been running away, and you can't really tell who's good and who's not," Jerry Wang, chief executive officer of Vision Investment Management, told an investment conference in Singapore.
"Essentially the higher the beta (volatility) the better. And I think what's happened in the past week or so will enable us to separate the men from the boys."
Vision, a Hong Kong-based fund of hedge funds, manages about $1.7 billion in assets.
Hedge funds are loosely regulated investment pools that aim to make money in both up and down markets, often by employing sophisticated trading strategies like short selling and leverage.
But these strategies can backfire when managers fail to anticipate or plan for major market swings. The most famous such case was U.S.-based Long Term Capital Management (LTCM), whose collapse shook the world financial system in 1998.
No major hedge fund failures have come to light since the start of the latest downswing.
But the fund of fund executives told a conference in Singapore that less-skilled managers will likely see their returns hit hard by the downturn. These managers will then have a tougher time attracting money from investors including fund of fund managers going forward.
"I want to know that they did the right thing at the right time, and also, that when things started to get better, that they didn't continue to run scared," said Gary Sabshon, who manages emerging markets investments for Tremont Capital Management.
The fund of fund managers said the longer-term outlook for Asia's hedge fund sector remains bright, because the region's less efficient markets offer ample trading opportunities.
Wang pointed to the convertible bond arbitrage sector, noting that in the United States there are "10,000 eyeballs staring at the screens" looking to capitalise on mispricing.
Distressed assets are another area where it is easier to make money in Asia than the United States because there is less information flow, he said.
"Because the markets are that less developed, the markets are a lot less crowded. While we don't have as many sophisticated strategies as you may have in the United States and Europe, what there are are (opportunities for) simple easy money to be made," said David Walter, head of research with KBC Alpha Asset Management, which oversees about $1.3 billion in assets in Asian fund of funds products.
The fund of fund managers said one of Asia's shortcomings was a lack of diversity in the strategies employed by hedge fund managers. More than 60 percent of Asian hedge fund assets are estimated to be long/short equity funds.
They said they would be keen to find more hedge funds that employ special situation or event-driven strategies, or specialise in volatility trading.
-Reuters-
Posted by su at May 25, 2006 11:11 AM