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Hans Schlaikier, Hedgeweek

Emerging market hedge funds lead Q3 returns… Blue Rice hedge fund to shut …

The HFRI Emerging Markets (EM) Total Index gained 3.0 per cent in 3Q13 and 2.5 per cent in October, bringing YTD performance for the EM Index to +4.7 per cent, outdistancing most individual EM local equity markets, according to HFR.

Total hedge fund capital invested in Emerging Markets increased to USD161.0 billion (Chinese RMB 980 B, Russian Ruble 5.29 trillion, Brazil Real 377 B, Indian Ruppee 10.3 trillion, Saudi Riyal 604 billion), the fifth consecutive quarterly record asset level for EM hedge fund capital.

EM performance gains in 3Q13 were led by funds investing in China, Korea, Russia and the Middle East, as equity markets recovered from losses experienced in the first half of 2013 (1H13).

The HFRX China Index gained 3.8 per cent in 3Q, bringing YTD performance to +10.5 per cent, leading the performance of Chinese equities by over 1600 basis points (bps). HFRX Korea Index posted a strong gain of 4.3 per cent in 3Q, topping the YTD performance of Korean equities by over 250 bps. Hedge fund capital invested in Emerging Asia increased by USD1.8 billion in 3Q to USD42.3 billion.

“Reversing significant declines in 1H13, EM equities posted a strong rebound in 3Q on continuation of US Federal Reserve stimulus measures (QE), extending gains of EM hedge funds which were well positioned for the equity and currency rebound, and driving total EM capital to a new record level,” stated Kenneth J. Heinz, President of HFR.

“With the prospect of US stimulus (QE) extraction still salient and likely to occur in coming months, EM hedge funds are positioning for unpredictable volatility and dislocations across EM currency, commodity, equity and fixed income markets which may occur despite continuing economic recovery across both developed and emerging markets. The EM environment is likely to continue to be dominated by these powerful trends, creating new opportunities and exposing new risks as EM and developed markets transition from the stimulus support which has defined the past few years of financial market performance.”

Blue Rice Investment Management, founded in 2009 by the former chief investment officer for Korea Investment Corporation, Guan Ong, will return capital by the end of 2013, he told Reuters on Tuesday, adding to a growing list of fund closings in the region.

The shutdown is part of a shakeout in Asia where smaller-sized hedge funds are increasingly throwing in the towel as they struggle to attract money from risk-wary institutional investors, casting a cloud over prospects of the USD141 billion industry in the region.

As many as 263 Asian hedge funds have closed since the start of 2012, eclipsing the 262 launched during the period, according to data from industry tracker Eurekahedge.
"The world is going to be a bit more volatile," Ong said. "The way our funds are structured, we kind of feel that it's better for us to return investors' (capital) when investors are still up."

Singapore-based Blue Rice managed less than USD100 million in September in two fixed-income hedge funds, the BRIM Asian Short Duration Fund and BRIM Asian Credit Fund, according to marketing material obtained by Reuters.

"We have informed all our investors and we are in the process of unwinding all our positions," Ong said.

Ong declined to disclose details on the performance of his fund, but a letter sent to investors showed his BRIM Asian Credit Fund was down 1.5 per cent through end of September this year, following a gain of 8.5 per cent in 2012.

Ong worked for the Korean sovereign wealth fund between 2006 and 2009 and when asked about his next career move, he said he was focused on unwinding the portfolio and it was too early to talk about his plans.

Large overseas investors can't get enough of big-name Asian hedge funds. Too bad there aren't more of them.

Deep-pocketed pension and endowment funds – many from the US –are coming to Asia in droves, ready to put cash in the region's hedge funds as the industry rounds out what is shaping up to be a second straight year of outperforming peers in the US and Europe. "There's a constant flow of investors regardless of conferences the past few months," said Martin Visairas, Citigroup Inc.'s head of Asia-Pacific capital introduction, noting this is a contrast to years past when most investors would time fund visits around other business trips to the region. Many are arriving prepared to do due diligence and map out investments rather than simply take meetings, he said.

One of those coming to the region with more frequency is Wayne Kozun, who manages the global hedge-fund portfolio of the Ontario Teachers' Pension Plan, with USD129.5 billion in assets at the end of 2012. The pension fund opened its first Asian office in Hong Kong this fall and has recently been talking to some of the city's hedge-fund managers. OTPP hasn't traditionally been a big investor in Asia-based hedge funds, instead leaning toward private-equity investments, Mr Kozun said.

Yet large investors, which typically want to invest at least USD100 million, are finding there is a short list of top-tier hedge funds in Asia that can handle both the size of their investments and merit a lengthy due-diligence process.

Max Gottschalk, Asia business head for Swiss fund Gottex Asset Management, estimates there are about three dozen hedge funds in Asia with more than USD1 billion of investor assets, compared with around 200 such North American funds counted by industry tracker Eurekahedge. Close to 40 per cent, he estimates, aren't currently taking new investor money. Eurekahedge puts the number of USD1 billion-plus Asian hedge funds at 25.

Some of the region's best-known funds are among those not currently taking new investor money, including the Myriad Opportunities Master Fund, led by former Highbridge Capital Management LLC Asia head Carl Huttenlocher, according to a person familiar with the fund.

Asian hedge funds are "increasingly more careful on their size," said Masa Yanagisawa, head of Deutsche Bank's capital introduction team for Asia. Lower liquidity in Asian markets is one reason, as well as a fund's own determination that the amount of money it is managing can be successfully put to work.

Hedge funds focused on Asian markets excluding Japan beat their global counterparts last year for the first time since 2009, according to Eurekahedge, and are on track to do it again this year with an 8.7 per cent gain as of October. Funds focused on Japan are doing even better, with a 23 per cent return. By comparison, North American hedge funds are up 7.4 per cent while European funds are up 6.7 per cent.

Geoff Barker, a former HSBC Holdings Plc economist, plans to start a new Asian macro hedge fund in March after lead managing an earlier pool to a 10.4 per cent annualized gain since 2006.

Counterpoint Asian Macro Fund will be managed by a venture he set up with City Financial Investment Co., making him the first Asia-based manager backed by the London-headquartered company, which is led by two former executives of Invesco Ltd.’s Perpetual asset management unit, he said.

Barker is the latest hedge-fund manager in the region to join what are known as “platforms” that provide non-investment services to help them cut startup costs and attract institutional investors. Hedge-fund startups are turning to the platforms, such as the one offered by City Financial, after funds-of-funds that rely on wealthy individuals lost assets following the global financial crisis in 2008, hampering smaller hedge funds’ ability to raise capital.

Managers already overseeing USD5 billion or more attracted USD127.5 billion of new capital since 2009, while smaller funds experienced net outflows, according to Chicago-based data provider Hedge Fund Research Inc.

City Financial will provide services such as accounting, information technology, legal and compliance in exchange for a share of Counterpoint’s fee revenue, Barker said. It can also help managers it backs raise money.

City Financial-backed managers oversee a combined USD1.3 billion of assets. It was acquired in 2006 by a partnership formed by Rob Hain, a former chief executive officer of Invesco Perpetual, and Andrew Williams, according to its website.

Among its backers is David Beatty, chairman of Temasek Holdings Pte-invested Inmet Mining Corp., owner of the second-largest copper project under construction.
Barker was the manager of the BIA Pacific Macro Fund, whose assets peaked at about USD400 million in 2009 after starting in March 2006, for Hong Kong-based Ballingal Investment Advisors Ltd. The fund was co-managed by the company’s chief investment officer, Andrew Ballingal.

The BIA fund returned 43 per cent in 2008, betting against equities and commodities while buying bonds, Barker said. Asian hedge-fund peers lost an average of 20 per cent that year, their worst annual loss, according to an index of Singapore-based data provider Eurekahedge Pte.

The BIA fund gained 20 per cent in 2011 and lost 17 per cent in 2009, its worst year, he added. It returned 22 per cent this year before Barker’s departure, making money from China’s liquidity squeeze in June, he said.

The Counterpoint fund, which Barker named to indicate his contrarian approach and ability to outperform in market downturns, will trade equity index futures, currencies, government bonds and commodities, Barker said.

Barker moved to Japan almost 24 years ago as the Japan economist and head of research for Baring Securities in Tokyo, according to an official biography. He went on to become HSBC’s Hong Kong-based chief economist and head of research in Asia before the Ballingal stint, it said.

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