Lanny Lim, Asian portfolio manager, SAIL Advisors

Asia’s hedge fund industry becoming more mature, says SAIL

Industry research this month suggests that Asian investors, in particular, are starting to favour Asian hedge fund managers as the eurozone’s problems show no clear sign of abating and the US economy trundles along lethargically.

If meaningful assets start flowing into Asia from local and global investors next year it could be the catalyst needed for the region’s alternatives industry to grow and compete more aggressively with the likes of New York and London.

All of which could put well-established FoF managers like SAIL Advisors in a strong position. “In terms of what makes us different from other people, there’s a couple of things: one is our Asian expertise, there aren’t many firms like ours that have been investing as long as we have in the region; secondly, we tend not to invest in big branded hedge funds. We look more for medium-sized hedge funds that we think have better alpha-generating opportunities,” explains Gunther Jost, head of sales and marketing at SAIL.

Based in Hong Kong, SAIL, which began life as a family office, runs approximately USD1.9billion of assets and has an enviable 15-year track record of investing in the region. Today, it still manages the money of the family office of Robert W Miller in addition to a number of institutional investors.

Currently, the firm manages five different FoF portfolios, two of which have a global mandate (Topaz Fund and Flagship Fund), one is an emerging managers portfolio, and two of which have an Asia focus (Asia Pacific Managers Fund and Asia Equity Alpha Fund).

Jost confirms that its global multi-strategy Flagship Fund is down only an estimated 0.25 per cent through November this year. Not bad when you consider the average FoFs, according to the HFRI Fund of Funds Composite Index, is down 4.9 per cent.

“Overall our funds have navigated the markets quite well this year. Our Flagship Fund is, I think, one of the better FoFs this year,” says Jost.

Lanny Lim (pictured) is the firm’s Asian portfolio manager. The Asia Pacific Managers Fund invests in multi-strategy managers whilst the Asia Equity Alpha Fund focuses more specifically on managers running equity l/s strategies. He confirms that the multi-strategy fund is down around 2 per cent through November. Put that into context, with the average Asian hedge fund down around 7.5 per cent (according to Eurekahedge), and the Asian equity market down 17.5 per cent, and performance is actually quite encouraging.

“Asian hedge funds have definitely improved since ’08 when most were long-biased. It’s not been easy this year, what happened in August caught everyone by surprise, but it shows that the risk management of Asian hedge funds is improving. Those who survived ‘08 have a better idea of how to manage difficult market situations. They reduced their net and gross exposures quickly this year. I think that shows the industry is developing into a more mature phase and the gap between US and Asian hedge funds is closing,” says Lim.

Many would agree that the weaker funds got weeded out in ’08. Asia’s positive survivorship bias, coupled with some high profile start-ups in Hong Kong this year, is helping to create a higher quality hedge fund community.

At present, SAIL’s Asian multi-strategy fund invests in 24 underlying managers. Most are Hong Kong and Singaporean managers but the fund also has exposure to Japanese managers operating out of both cities. Lim says that they allocate to managers where they believe there’s alpha to be made and vary exposure to strategies accordingly.

“We don’t have a range of weighting for any strategy. It really depends on where we think we can make money for our investors,” says Lim.

Equity l/s and market neutral strategies have been important strategies for the fund in 2011. Due to concerns over global trading fundamentals Lim says that in Q2 he started increasing the portfolio’s exposure to market neutral managers. He says he was more concerned that another quiet summer in Europe and the US would soften the markets but had no idea just how bad the eurozone crisis would become.

“In Q2 I made a conscious move to put a soft hedge into the book by allocating more to market neutral funds. This supported performance in Q3 and we’ve been outperforming the Eurekahedge FoF index all through the year. In Q3 it was our market neutral exposure that helped separate us from the pack,” says Lim.

As much as 23 per cent of the book has been invested in this strategy, Lim confirming that all its managers are up between 3 per cent and 10 per cent for the year. It seems to have been a prescient allocation decision.

As for equity l/s, Lim started investing in a selection of stock pickers in mid 2010. Performance was good, right through the first half of 2011. “Our long/short book was up this year right through to October despite terrible market movements. The strategy is still producing alpha but the absolute return is not quite there, particularly in Q3,” adds Lim.

SAIL Advisors is able to identify exciting managers that haven’t grown too quickly thanks to its well-developed network in the region and rigorous research team. Big Asian hedge funds that reach capacity quickly simply aren’t their cup of tea. Lim says they favour managers who are still under the radar. Indeed, 40 per cent of the book is less than 2 years old. The trick, says Lim, is to find managers early before their track records generate interest from big investors.

The best performing manager in the multi-strategy portfolio is an Asia-based global macro fund, up around 20 per cent YTD. The worst performing manager is a multi-strategy manager, down around 20 per cent. “He takes concentrated chunky positions, which are fine when they work out but make things tough when they don’t,” reflects Lim.

Although SAIL Advisors have seen positive asset inflows this year, Jost points out that it’s the Asian funds that have generated particular investor interest. This has no doubt been helped by the August 1 launch of the Asian equity l/s portfolio. Jost thinks this is going to be of more and more interest to US and European investors.

“I think investors will consider it as an addition to their Asian long-only portfolios, or even as an alternative because they like the risk/return profile the fund can provide,” says Jost. It aims to limit the downside to one third of the market and at the same capture two thirds of the upside. Currently, the fund invests in 12 underlying managers.

Despite launching at possibly the worst time of the year, when eurozone volatility sent markets spiralling, the fund is only down 4 per cent. “We launched it because a lot of investors were saying they liked our Asian multi-strategy fund but they were looking for something a bit purer and niche in the equity space. Investors want to capture the upside in equities and hopefully this fund will do that, as well as also protecting on the downside,” confirms Lim.

As to what 2012 has in store, Lim thinks it’ll be a binary environment: things could be more positive than people expect if eurozone issues get resolved, or they could capitulate even further. Although worried about an implosion Lim is also cognisant of the fact that the general consensus is rarely right.

“I’ve been in the industry 20 years and I’ve never seen a consensus at the beginning of the year be correct come the end of that year. We’re positioned for more disappointment, but we’re also one of the few FoFs in Asia ready to act significantly if it’s better than people expect.”
 

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