Hans Schlaikier, Hedgeweek

Indian hedge funds underperform… Arena Capital Offshore Fund trails Japan rally… hedge funds bet on Fannie and Freddie recovery…

India-focused hedge funds should be avoided, shows the Eurekahedge Hedge Fund Index of 2,404 funds and their performance for the first 4 months of 2013.

These funds have posted a loss of 0.2 per cent for the January-April, 2013 period, whereas the BSE benchmark S&P Sensex gave a moderate return of 1.5 per cent, indicating that the hedging strategy has missed the mark.
 
In contrast, hedge funds targeted at Asia on average earned returns of 9 per cent. Funds targeted at India’s emerging market peers China (up 6.9 per cent) and Brazil (up 3.2 per cent) were also able to at least deliver a positive return. Japan-focused hedge funds are the clear winners of 2013 so far: they delivered an 18.5 per cent return for the first four months of the year.
 
A closer analysis of hedge funds operating in India indicates that hedge funds with a long-short equity strategy have been the main drag on overall performance of hedge funds operating in the country. Long-short equity strategy funds, which use leverage, derivatives and short positions in an attempt to maximize total returns, regardless of market conditions – have shed 2 per cent in 2013 so far. In contrast, both arbitrage funds and fixed income funds were up 2.2 per cent and 2.5 per cent, respectively, in the first four months of the year.
 
In the year 2012, hedge funds with a long-short equity strategy were the best performers in India, achieving a return of 15.2 per cent. Arbitrage funds earned 8.5 per cent, but fixed income funds did poorly, losing 0.7 per cent during the year.
Globally, large-size funds with a corpus of over USD500 million were the best performers, achieving a return of around 4.3 per cent, compared to a 4.1 per cent return for medium-size (USD100-500 million) and 3.6 per cent for small-size (less than USD100 million) funds.
The best-performing category was distressed debt funds (6.7 per cent returns), followed by long-short equity (5.3 per cent) and event-driven (4 per cent) funds.
 
Arena Capital Offshore Fund, a Japan-focused hedge fund run by Highbridge Capital Management LLC alumnus Toby Bartlett, trailed its peers even as the nation’s stocks surged to the highest since 2008.
 
The USD44 million hedge fund, backed by a division of Man Group Plc (EMG), returned 2.6 per cent this year through April, according to its April newsletter to investors seen by Bloomberg News. This year’s gain compares with the 8.8 per cent return by the Eurekahedge Asia Hedge Fund Index and the 19 per cent gain by the index that tracks Japan-focused funds.
 
Japan’s benchmark Nikkei 225 Stock Average (NKY) surged to the highest since June 2008 last month as Prime Minister Shinzo Abe and the Bank of Japan expanded money supply to beat deflation, weakening the yen and boosting earnings of exporters. The fund, which employs a market-neutral strategy that seeks to profit regardless of market directions, is focused on risk-adjusted returns used by investors to measure performance, said Arena Capital Management Ltd.’s Chief Investment Officer Bartlett.
 
The fund, which began trading in October, lost 0.3 per cent in its first three months of trading. The fund, which was 100 per cent invested in Japan at the end of April, doesn’t take a view on the market or industries, minimizing such risks by trading buckets of related stocks, according to the newsletter. Net exposure, the difference between its bets on rising and falling stocks, was below 2 per cent, the newsletter showed.
 
It targets mid-teen annual returns and invests in liquid stocks mainly in Japan and North Asia domestic-demand-related industries, according to a fund newsletter.
 
Hedge funds are betting on the recovery of government-controlled enterprises (GSEs), particularly Freddie Mac and Fannie Mae, reports The Wall Street Journal.
 
Ironically, these are the same hedge funds, which made hundreds of millions in profits when the housing market crashed in 2008, including Freddie and Fannie.
 
The report identifies hedge funds Paulson & Co. and Perry Capital LLC as among those which have been buying preferred stocks in Freddie and Fannie. Indeed, the two enterprises are returning to profitability as the U.S. housing industry is showing good signs of recovery, and may eventually make payments to preferred shareholders. More importantly, hedge funds are looking for a higher payout this time as they hope that the Feds raises more capital for Freddie and Fannie.
 
An earlier report by Fierce Finance said that Paulson was looking for big profits on Freddie and Fannie and had been loading up on ultra-cheap preferred shares, betting that firms may someday rise from the ashes by paying off their debts to taxpayers and becoming fully rehabilitated private entities.
 
Already, hedge funds have raised their lobbying efforts in Congress to ask the U.S. government to sell their stakes in the firms, the report added.
 
The improving finances of the two government-owned mortgage companies have raised hopes among shareholders that they could be revived as private firms. Even as lawmakers from both parties and U.S. housing officials say that won’t happen, preferred shares of Fannie Mae have more than doubled in price since early March, the report adds.
 
Reuters also reports that John Paulson is betting more heavily on mortgage insurers during the first quarter, as he may expect the housing recovery to grow stronger in the months ahead.
 
Most Asian stocks dropped on Thursday the 9th May (Nikei-225: -0.66 per cent, Hong Kong: -0.63 per cent, Shanghai SE: -0.59 per cent, Taiwan SE: 0.23 per cent, ASX: -0.03 per cent, Kospi: 1.18 per cent) after Chinese producer price data for April pointed to a slower than expected demand recovery in the Asian giant, according to some economists and despite a surprise interest rate reduction by the central bank of South Korea.
 
Consumer price data out in China overnight came in slightly higher-than-expected, at a 2.4 per cent year-on-year increase which was nonetheless well below the 3.5 per cent target set by the country´s monetary authority. Equally as significant may be the deeper decline seen in producer prices in the same month, versus March.
 
South Korea’s central bank surprised markets by cutting its main policy rate by 25 basis points, to 2.50 per cent as well on Thursday. Which came after New Zealand admitted on Wednesday that it has been active in foreign-exchange markets. Both of these events may have played a hand in the small rise seen in the Japanese Yen, which ellicted some selling in shares of Japanese exporters, such as Canon, Bridgestone, Honda or Toyota.
 
Nevertheless, it must also be had in account that the components of the benchmark Japanese Nikkei-225 are now trading on an average price-to-earnings ratio of 20.7 times forward earnings, versus 14.8 for the American Standard&Poor´s 500.
 
Controversially at a recent event Kyle Bass, of hedge fund manager Hatmann Capital, predicted that Japan will be consumed by a debt crisis which will surpass the US sub-prime crash.

Further reading



Upcoming events

1 day 12 hours from now - Vienna
5 days 12 hours from now - New York
5 days 12 hours from now - New York
5 days 12 hours from now - New York
5 days 12 hours from now - New York

Upcoming training

Mon, 29/09/2014 (All day) - London
Thu, 02/10/2014 (All day) - London