Hans Schlaikier, Hedgeweek

Hedge funds post third consecutive positive month… Asian hedge funds 42 per cent cheaper to run…

Hedge funds delivered their third consecutive month of positive returns as global markets maintained their upward momentum. The Eurekahedge Hedge Fund Index was up 1.37 per cent during the month, edging past the MSCI World Index, which gained 1.27 per cent in the month of November 2013.

Global markets remained upbeat on the back of positive macroeconomic data from the US, with incoming Fed chair Janet Yellen's testimony before the Senate's Banking Committee adding a further dose of optimism to the markets as she reiterated the necessity of the Fed's QE program for an enduring recovery in the US economy. Asian markets edged upwards on the back of strong third quarter GDP estimates from China, with markets reacting positively as details emerged regarding the CCP’s third plenary session.

All regional mandates, with the exception of Eastern Europe & Russia, posted positive returns with Asian hedge fund managers leading the way. The Eurekahedge Asia ex Japan Hedge Fund Index is up 1.73 per cent during the month, outperforming the MSCI Asia Pacific ex Japan Index which was down 0.05 per cent. Japanese fund managers posted yet another month of positive returns, up 1.27 per cent as the Nikkei 225 Index climbed 9.31 per cent helped by a fall in the value of the yen relative to the dollar.

All hedge fund strategies, excluding relative value, were in the positive with fixed income fund managers leading the pack with returns of 7.28 per cent during the month. Long/short equity managers were up 0.97 per cent as equity markets rallied, while event driven strategies raked in gains of 1.44 per cent, with the Eurekahedge Event Driven Hedge Fund Index up 10.36 per cent year-to-date. CTA/managed futures funds utilising systematic strategies were up 1.41 per cent while those deploying quant strategies saw gains of 1.71 per cent during the month.

Key highlights for November 2013:

Total assets in the hedge fund industry are now at a record of USD1.97 trillion, surpassing the previous record of USD1.95 trillion in June 2008 whilst net asset flows for the year were recorded at USD122.2 billion, with net allocations to North American managers standing at USD64.0 billion year-to-date.

In particular Asia ex-Japan hedge funds have outperformed the underlying markets by more than 10 per cent November year-to-date whilst Japanese hedge funds remained ahead of other regions, up 24 per cent as at end-November.

Greater China focused hedge funds outperformed the Hang Seng Index by over 12 per cent as at end-November and Distressed debt investing remain the best performing strategy in 2013, up 14.81 per cent November year-to-date
 
Running a hedge fund in the Asia-Pacific region can be as much as 42 per cent cheaper than in the US and Europe, helped by lower-than-average compensation, according to a survey by Citigroup Inc.

Small funds started in the region struggle to achieve profitability and expand assets, the fourth-largest U.S. bank cautioned. Ninety-five, or 57 per cent, of the 167 regional equity long-short hedge funds which began trading with less than USD50 million still manage less than that amount after an average of 5.3 years in existence, it added, citing data from Singapore-based Eurekahedge.

The USD2.5 trillion global hedge-fund industry is facing pressure to cut fees to attract investors amid rising costs of complying with regulations and client demand. The average Asian hedge-fund startup raised USD8 million this year, down from USD25 million seven years ago before the 2008 global financial crisis dented investor interest, according to Eurekahedge data provided in early November.

Management fees charged by hedge funds globally have fallen to as low as 1.58 per cent for all but the largest companies, from the previous standard of 2 per cent, as startup managers have been pressed to offer discounts to early investors. A hedge fund on average needs to manage at least USD300 million to break even, the Citigroup global survey released late yesterday found.

In Asia, operating expenses of a USD100 million hedge fund are 20 per cent lower than in the US and Europe. The gap widens to 42 per cent for a hedge fund managing USD500 million and 39 per cent for those with assets of USD1.5 billion, it added.

Asian hedge funds may break even at USD135 million, relying solely on a 1.5 per cent management fee, Citigroup estimated.

The survey sampled 124 hedge-fund managers in North America, Europe and Asia with combined assets of $465 billion.

Alp Ercil, a former regional head of New York-based hedge fund Perry Capital LLC, won USD1.1 billion of investor commitments for his second Asia distressed-assets fund, according to two people with knowledge of the matter, reports Bloomberg.
 
ARCM Master Fund II will focus on three- to five-year investments in credit and equity securities, said the people who asked not to be identified because the information is private. The amount of capital committed made it the largest hedge fund started in Asia this year, according to data from Singapore-based Eurekahedge Pte.

Global banks have scaled back lending and distressed investments in Asia after the global financial and European debt crises led to tighter regulatory scrutiny of their investments since 2008. Asian managers like ARCM and PAG, another Hong Kong-based company, have started distressed assets and loan funds to fill the void.

Ercil’s Hong Kong-based company, Asia Research & Capital Management Ltd, also known by its acronym ARCM, sought money for the second fund after it had fully invested capital in the USD935 million maiden vehicle started in 2012, the people said. Bill Wong, ARCM’s head of operations, declined to comment on the fundraising.

The Eurekahedge Distressed Debt Hedge Fund Index returned 19 per cent this year through November, the top-performing hedge fund strategy tracked by the data provider. It generated the best returns among hedge-fund strategies globally in 2010 and 2012, according to Eurekahedge.

The majority of the first ARCM fund’s investments have been in distressed credit in the region, including Japan and Australia, said the people, who declined to give information on its return. The second fund received the capital from the same investors, they said.

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