Hedge funds around the world saw negative returns in June to end seven months of straight gains amid a broad pullback in equity markets. According to data compiled by Eurekahedge those in Asia ex-Japan were the worst hit.
The Eurekahedge Hedge Fund Index fell 1.47 per cent in June, marking its first decline this year, the company said in a note published late on Wednesday. That compared with a fall of just over 3 per cent in the MSCI World Index.
"June witnessed a continuation of downside momentum from the end of May as markets reacted adversely to speculation about a slowdown in the Fed's bond buying operations," Eurekahedge said. "Asia ex-Japan markets were the worst hit as lackluster manufacturing data from China continued the flow of dreary macroeconomic numbers from China," it added.
Hedge funds have profited from the sharp gains in equity markets since last year.
But talk that the Federal Reserve could start to take back its monetary stimulus for the US economy has unnerved global stock markets in recent months and some analysts say that uncertainty is also weighing on hedge funds.
Signs of weakness in regional powerhouse China have dealt an additional blow to Asian markets. Last month's closely-followed purchasing managers' surveys pointed to continued decline in manufacturing activity, while news on Wednesday that Chinese exports fell unexpectedly in June fueled concerns about China's economic outlook.
The Eurekahedge Asia ex-Japan Hedge Fund Index was down 4.63 per cent in June, registering the largest decline among the research firm's regional indices. The North American Hedge Fund Index was down just 0.10 per cent, while the European Hedge Fund Index slipped 1.16 per cent.
Still, the Asia ex-Japan index outperformed the MSCI Asia ex-Japan stock index, which fell almost 7 per cent last month.
Eurekahedge said its Japan Hedge Fund Index rose 0.15 per cent in June, taking its gains so far this year to about 17.4 per cent – the strongest of the regional hedge fund indices.
US fund of hedge funds SkyBridge Capital LLC is entering South Korea by striking a partnership with Woori Financial Group. The agreement allows SkyBridge, which has approximately USD8.2 billion in assets under management and advisory, to distribute its hedge-fund products in South Korea, home to the world’s fourth-largest pension fund.
Woori Investment & Securities Co, a unit of South Korea’s largest financial group, will allocate capital to one of SkyBridge’s funds as part of the pact, the US fund said in a statement Tuesday without disclosing financial details.
Foreign hedge funds are expanding in the region, attracted by large pools of capital held by state pension funds such as South Korea’s National Pension Service, which have comparatively tiny allocations to hedge funds compared with their western peers. NPS had 406 trillion won (USD353.54 billion) in assets as of March.
Despite ample capital in South Korea, hedge funds trying to break into the country are likely to face an uphill battle. Many South Koreans have a negative perception of the hedge-fund industry, after speculative investments from foreign funds caused the country’s financial markets to tumble during the Asian financial crisis in the late 1990s.
The South Korean government has been trying to foster the growth of a domestic hedge-fund industry since 2011, but it has had limited success even as the financial regulator eased restrictions on short selling.
Kohlberg Kravis Roberts & Co LP (together with its affiliates, “KKR”) recently announced the closing of its Asian II Fund at USUSD6 billion, making it the largest-ever pan-Asian private equity fund.
The Asian II Fund marks the firm’s third successful fund raising in the region, following its USUSD4 billion regional fund in 2007 and its USUSD1 billion China Growth Fund in 2010.
Joseph Bae, Member & Managing Partner of KKR Asia said: “The successful close of our second Asian fund is a testament to our strong track record in the region. We look forward to continuing to generate positive results for all our stakeholders. Having invested more than USUSD5.5 billion in Asia since 2005, we have demonstrated to investors our commitment to the region, as well as the effectiveness of our successful global-local and partnership approach.”
GFIA’s June insights show a glimmer of increased confidence in the opportunities out there for boutique Asian hedge funds. Peter Douglas, GFIA founder, writes: "At an aggregate level, it's still a very tough world out there. No manager we've spoken to this year has said anything except "asset raising is hard". Even if there's a mini-renaissance, the number of allocators globally that are prepared to write tickets to smaller managers remains far smaller than five years' ago."
However, Douglas reports that there is increasingly some stability, with the better managers gradually attracting some assets back. "As boutiques with limited appetite for scale, some are closing or close to closing. The characteristics of the success stories are generally comparable (happy families all look alike!). The longer experienced managers, that have ten-year track records and a history of riding storms, are at the front of the line. Unsurprisingly, for many investors, if they're to take the perceived risk of allocating to small managers, they want the comfort of longevity and reputation. Ward Ferry, Quest, India Capital… all are seeing some resurgence."
In terms of what Douglas calls 'a distinctive strategy that has some track record but little competition', he focusses on the Asian fixed income strategies and the relative value managers.
"Delivering a risk/return profile that is not only successful, but uncorrelated within its universe and hard to find, is a good way to be noticed. Hence managers like Serica, MNJ, and Northwest are gaining traction. Finally, value for money! Much of the reason for the resurgence in unconstrained long managers that we've remarked on frequently, is that, in Asia, good stockpicking (in inefficient markets) is a reliable source of alpha, delivers beta in a part of the world that is delivering economic growth and hence generally rising asset values, and is half the price of a hedge fund. Ask Arisaig, One North, or Albizia."
Douglas attended the Deutsche Asia prime broking event and reports that generally the prime brokers, lawyers, and administrators out there are busy and the pipeline appears to be reasonably full. He writes: "We still believe that the industry is stressed. By number of managers out there, the majority remain stressed and unprofitable. A renewed bout of uncertainty resulting in an evaporation of investor risk appetite would hit the smaller managers hardest. And fees are clearly coming down as large investors' bargaining power meets the clear oversupply of choice in the industry. But we are more positive than we were twelve months ago that there is a future for the best of the boutiques in Asia.