Hedge fund managers in Asia are bullish about their prospects in 2013 in the light of positive performance in 2012, according to Eurekahedge chief executive, Alexander Mearns.
Mearns was quoted by a regional publication as saying, "There were, and continue to be, substantial gains to be made through inefficient prices within the ASEAN region for those who look hard enough."
According to the latest data, the Eurekahedge Asia ex-Japan Hedge Fund Index posted 11.5 per cent gains last year as against the MSCI Asia ex-Japan, which rose 19.4 per cent during the same year.
According to Mearns, many of Asia’s long/short equity fund and multi-strategy funds made money in 2012 "by maintaining a long bias in their portfolios."
This year, Mearns said Eurekahedge expects positive net inflows into Asian hedge funds given strong returns in 2012.
Earlier this month, research firm Cerulli Associates reported that Asian fund managers believe pension funds will be the most profitable institutional business followed by central banks and quasi-government agencies, moving forward.
Asset managers in Asia believe that the large size of these institutions, as well as their willingness to engage external managers and move into riskier assets, including equities and alternatives, are the reasons behind their potential appeal.
The Pacific Group Ltd, is converting one-third of its hedge-fund assets into physical gold, betting that prices will go up as governments print more money to pay off debt.
The Hong Kong-based asset manager plans to take delivery of USD35 million worth of gold bars that can be traded on the London Bullion Market Association and other international markets, William Kaye, its founder and chief investment officer, said in a telephone interview. It has secured vault space at Hong Kong International Airport to store the gold, he said.
Investors disillusioned with government money printing to service “insurmountable” public debt may seek alternatives to fiat currencies, Kaye said.
“Gold, the way we look at it, is anywhere from being undervalued to being seriously undervalued,” Kaye said. “We’re in the early stages, in our judgment, of what would likely be the world’s largest short squeeze in any instrument.”
Fiat currencies have no tangible backing, such as gold or silver, except governments’ good faith and can become worthless due to hyperinflation or loss of public faith.
Pacific Group’s USD95 million Greater Asian Hedge Fund, which started trading in 2001, returned 2.8 per cent last year, taking the cumulative net return since its February 2000 inception to 195 per cent. It suffered two down years in 2008 and 2011, according to its December 2012 newsletter.
For those investing into Asia's hedge funds last year, size did matter and it seems smaller was better. The region's largest hedge funds delivered weaker returns on average than small to medium-sized funds, according to fund research and people with knowledge of the funds.
In a year when several Asian stock markets rallied to post positive returns, many bigger hedge funds failed to beat their benchmark.
Blue chip funds such as Ortus Capital Management and Senrigan Capital lost money, while high-profile launches Azentus Capital and Dymon Asia ended the year barely in the black, said people familiar with their returns. Smaller hedge funds such as Factorial and the Splendid Asia macro hedge fund, however, made their investors richer.
The numbers for last year will do little to dismiss the cynical view that hedge fund managers who raise a lot of money get rich from the management fee, regardless of performance.
Most home-grown Asia hedge funds managing more than USD500 million each fared worse than their reference indices, underscoring the premise that good performance becomes less likely when a fund exceeds USD500 million.
The returns from top funds are feeding a perception among investors that Asian hedge funds don't provide the results to match the risk that investors associate with the region.
As the numbers come under scrutiny, Asian names producing single digit returns may face the axe as investors can achieve similar or better returns in developed capital markets where there is relatively less risk and far more consistent liquidity.
Favourable recent Asian hedge fund performance has spurred hopes of a better year ahead as the industry contends with a drop in assets on the back of disappointing 2011 returns.
Event-driven was the best performing strategy in the region, with an average return of 28 per cent in 2012, according to data provider Eurekahedge.
Asian long/short equity – the region’s predominant strategy – also fared well, with an average 11.7 per cent full-year return, as did relative value (11.2 per cent) and fixed income (10.8 percent).
Despite the positive figures, it was a challenging year for the industry, with managers finding it difficult to navigate markets on a month-by-month basis. Asian strategies, on average, turned in losses between March and July before realising gains in the last few months of the year.
Among seasoned Asian managers, 2012 returns were typically in the mid-to-high single-digit range.
The region had negative net flows of USD500 million last year, according to Eurekahedge, attributable in part to the industry’s poor average performance in 2011.
North American hedge funds, by contrast, saw total inflows of USD69 billion in 2012.
The attrition rate of hedge funds is not anticipated to rise, having remained fairly steady in the past two years. Last year, 102 Asian strategies launched, while 118 closed. In 2011, there were 140 fund launches and 148 closures.
Industry estimates put total Asian hedge fund AUM at about USD140 billion, below a peak of USD176 billion in 2007.
Although assets have yet to recover to pre-crisis levels, the number of hedge fund administrators – whose income is directly tied to client AUM – continues to grow.