Thu, 28/11/2013 - 16:37
According to independent data provider Eurekahedge in its latest report on the state of the world’s hedge fund industry, hedge fund assets under management were up in October, after a positive September. The size of the industry is now USD1.97 trillion.
Perhaps more heartening, the additions to AUM in October weren’t (mostly) from inflow. Roughly 95 per cent of the increase was from performance.
Both Europe and Asia ex-Japan attracted capital during the month whilst Japan was flat and the Americas saw a net outflow. Globally, October was the fourth consecutive month of net positive inflow.
Looking at asset change by strategic mandate, long/short equity funds were strongest in October, seeing the largest growth both by flow and by performance. October is merely one month in a good year for that strategy: long/short equity funds have attracted a total of USD676.1 billion in 2013 YTD.
Event-driven funds, despite a respectable performance in what was their fourth consecutive month of positive returns, saw the largest negative flow.
Breaking down event-driven funds by geography: they did very well in Europe and in North America in October, not quite so well, though still in positive territory, in Asia, both Japan and ex-Japan. Their performance in Latin America was in negative territory.
According to Eurekahedge, FoFs have gained 4.18 per cent year to date and have outperformed the benchmark, the Eurekahedge Hedge Fund Index, in five of the first nine months of the year.
Despite this Eurekahedge notes that since 2009, FoF closures have exceeded new launches, in 2013 YTD by roughly a 3:1 ratio.
As reported by Reuters, Capital-starved Asian hedge funds may have got a source of capital they've been waiting for - investors from China, some of whom are willing to risk very large sums of money.
This new source of capital is a potential game changer for an industry that has been dependent on the whims of U.S. and European fund flows.
It may also represent a key turning point in the movement of Chinese wealth offshore as the world's second-biggest economy becomes more flexible about inbound and outbound investments.
Up until recently Chinese capital was barely noticeable, industry sources say. But this year more than half a dozen firms in Hong Kong, mainly investing in the Greater China region, have gathered at least USD500 million from mainland investors, according to Reuters.
Spurring Chinese interest has been a strong performance by Asian hedge funds this year, as well as market reforms and the sense that high-yielding wealth management products in China are becoming unsustainable as they draw scrutiny from authorities.
Investors include Zhang Lei, founder of Asia's biggest hedge fund Hillhouse Capital, members of China's wealthy elite and Chinese private equity firms. There is also at least one listed firm - gold producer Zijin Mining Group Co Ltd which set up its own fund, providing USD100 million in capital.
While much of the world's hedge fund industry has recovered from the global financial crisis, Asian hedge funds have not -hampered by poor performances until last year, as well as their small size.
More than three quarters manage less than USD100 million, too little to win big ticket investments from U.S. and European financial institutions such as pension funds.
As of end-September, Asian hedge funds managed USD141 billion, still a fifth below pre-crisis levels and just 7 per cent of the global total, according to industry tracker Eurekahedge.
Industry insiders say Asia's hedge funds need to grow to around USD200-300 million in assets under management to attract institutional money.
Sources said that whereas the small set of Asian millionaires who do invest in local hedge funds typically allocate a few million dollars, the money flowing from China often comes in larger helpings - in some cases more than USD50 million from just one backer, enough to start a hedge fund.
In addition to money flowing into established funds, the push is also feeding off the ambitions of experienced managers that have established track records at well known global hedge funds and are keen to start their own businesses.
Encouraging this new flow of funds has been a near 16 per cent outperformance by China-focused long/short equity hedge funds over the MSCI China index .
Assets of Greater China-focused funds rose to USD12.9 billion in October, the highest level on record and 16 pct higher than the pre-crisis peak, according to Eurekahedge.
Reforms that have loosened some investment rules over the past few years are also providing a tailwind and are likely to continue to do so after China said this month that the market would play a decisive role in the economy.
The Wall Street Journal reports that the week-long retreat of the Australian dollar, one of the worst-performing currencies globally in 2013, returned anew Wednesday as global hedge funds sold the unit heavily in response to recent warnings from the central bank it is still too high.
The Aussie slumped to its lowest level since Sept. 4 in New York on Tuesday and then failed to bounce in the Asia session Wednesday, leaving traders to speculate a second wave of selling may be in the offing when European and U.S. investors rejoin the market in coming hours.
"Hedge fund and model fund selling was tipped amid heavy losses during the European morning," said Sean Callow, senior currency strategist at Westpac.
The publication of a downbeat forecast for the Australian dollar in 2014 by Goldman Sachs also soured the mood of the market. Goldman's is tipping a possible slide to USUSD0.8000 for the Aussie next year as the commodity-led economy grows slowly and the U.S. dollar recovers.
At 05.15 GMT, the Australian dollar was trading at USUSD0.9124, down from USUSD0.9183 at the same time Tuesday. It traded as low as USUSD0.9100 during the session.
The Aussie has fallen over the last week from around USUSD0.9450 after Reserve Bank of Australia Governor Glenn Stevens said he was "open minded" on the topic of intervention to weaken the Australian dollar. A government update on mining investment in Australia also dragged on the Australian dollar.
The Hong Kong government should consider introducing a change in the law to allow private equity funds to be set up as limited partnerships, so as to further enhance the city's fund industry, a member of a government advisory body says according to the South China Morning Post.
Florence Yip Chiu Kwai-fong, financial services tax leader of PricewaterhouseCoopers, sits on the Financial Services Development Council (FSDC), which was appointed by Chief Executive Leung Chun-ying in January.The FSDC released its first set of reports last week on what can be done to enhance the city's competitiveness.
Yip, who focuses her work in the council on finding ways to promote the local fund industry, said many overseas private equity funds are set up in the form of limited partnerships, a structure that is not available in Hong Kong."If the Hong Kong government would consider introducing a change in the law to allow private equity funds or certain non-retail fund products to be set up as limited partnerships, it would attract more international fund houses to set up such funds here and hence promote the fund industry in Hong Kong," she said in an interview with SCMP.
Yip said the council has submitted this suggestion to the government and hopes consultation on it will be undertaken soon. Investors enter a limited partnership as passive limited partners with limited liability and are not involved in the management and investment of the funds, which are the duties of a general partner. The general partner may delegate these duties to other fund managers.
"Such limited partnerships are popular in the US and Europe, as they allow more flexibility to investors and fund managers. The law on the mainland also allows onshore limited partnerships for private equity funds, but such structures are not allowed in most Asian cities, including Hong Kong and Singapore," Yip said.
Hong Kong currently allows a fund to be set up as a trust, which many fund managers complain is not a suitable structure for private equity funds. "For Hong Kong to compete for the role as the Asian hub for international funds, which will domicile here, the city has to allow private equity funds to be set up in a more flexible way," Yip said.
Currently, among the 1,800 retail funds with operations in the city, only about 300 are domiciled in Hong Kong, with the rest mainly based in Europe. Their fund administration functions are mainly based in Dublin and Luxembourg. There are no private equity funds domiciled in Hong Kong.
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