Turmoil in emerging market currency markets has clearly reflected in hedge fund performance. The latest data from eVestment shows a mixed reaction to the tightening of monetary policy by the US Federal Reserve.
Flows into emerging market funds were at their most negative in July compared with the previous year. The surge in redemptions ends what was seen as a mini-rebound of investor interest towards emerging market hedge funds.
Hedge Fund Research also emphasises the attraction of Asian hedge funds within the emerging markets category in its July data. It reports new inflows in July were concentrated in equity hedge strategies and Japan-focused funds.
Total capital invested in the Asian hedge fund industry increased to more than USD98.4 billion in the second quarter, the highest level since 2007, while total global hedge fund industry capital increased by nearly USD40 billion to a record USD2.41 trillion in the quarter.
Within emerging markets Africa and the Middle East have been one of the better-performing segments of the hedge fund industry in terms of regional exposure, according to eVestment data. Through July this group was up more than 13 per cent putting it above every other segment besides Japan and funds focusing on the healthcare sector.
Outside emerging markets but within Asia, investor sentiment towards Japan appears to be changing. While starting the year strong, investment flows appear to be tapering down as performance of Japan-focused funds also slows, says eVestment. Although this group of funds is up around 22.5 per cent at end July – the best performance of the hedge fund industry – flows into funds focused on Japan were slightly negative in May and were lower in June and July compared with the beginning of the year.
Wells Fargo & Company is set to increase the number of fund-services clients in Asia by almost 20 per cent annually. The US banking major currently has 20 clients receiving its fund services in Asia, which mostly include single-manager hedge funds, along with traditional, private-equity and hybrid funds.
Asia’s economic growth and rising opportunities for investment have attracted major banks such as HSBC Holdings plc and State Street Corporation. Notably, Asia at present contributes 15 per cent to Wells Fargo’s global fund services revenues. The bank intends to enhance its operations in the region, primarily Hong Kong, as the market there is believed to have considerable growth potential.
According to Bloomberg, the Asia Pacific region issuers raised USD1.8 trillion from bond sales since the beginning of 2012, attributable primarily to low interest rates and narrow credit spreads. The proceeds marked an 18 per cent rise from the amount generated two years back.
Wells Fargo’s fund services unit dates back to Cargill Inc.’s Black River Asset Management LLC hedge-fund division. Since Jan 2007, Wells Fargo’s unit has operated through a Singapore-based office. It was only in Dec 2012 that the banking major announced the opening of an office in Hong Kong.
With the strength of roughly 40 people, Wells Fargo’s unit in Asia provides conventional administration and outsourced middle-and-back-office operations. The company believes that it will have an edge by raising issuances of high-yield bonds as its prospects depend on managing more complex funds like credit and those that involve emerging markets.
A US appeals court ordered Argentina on Friday to pay USD1.47 billion to hedge funds holding its defaulted bonds, quashing an appeal by Buenos Aires against the initial 2012 judgment.
In a case closely watched by financial and debt markets, the court endorsed the original decision that Argentina must compensate two hedge funds 100 per cent of the value of defaulted Argentine government bonds they hold, even though the two declined to take part in a restructuring of the debt.
Argentina had not made a convincing case that the court had abused its discretion, the decision said, and had also not proposed a viable alternative way to settle the debts. In addition, the New York federal court said, Argentina’s lawyer in the case and Argentine officials "have publicly and repeatedly announced their intention to defy any rulings of this court and the district court with which they disagree."
Given those points, the court said, it affirmed the earlier judgment, which was rooted in the specific contract obligations of the borrower.
However, it added, given that Buenos Aires had requested the US Supreme Court to weigh in on the case, it would hold off on enforcing the decision to force Buenos Aires to repay the debts.
The stay on enforcement effectively bought more time for Argentina, which has said that the court decision could force it back into default on all its debt.
The Argentine government has argued that bondholders who took part in the 2005 and 2010 restructuring of nearly USD100 billion of defaulted debt, which forced on them huge writedowns of the face value of the bonds, would now be able to lay claim as well for 100 per cent compensation.
That could overwhelm the country’s finances and lead to a fresh default, Argentina has argued.
The case has implications for the massive global market for sovereign debt.
Critics say the New York judgment could set a precedent for all sovereign debt restructurings in which a majority of bondholders, but not all of them, accept a "haircut" or writeoff of the debt’s value in order to help the borrower restore financial stability and make good on at least a part of the bonds’ worth.
Analysts have pointed to the risks implicit for the massive restructuring of Greece’s debt, a cornerstone of the international bailout by the European Union, European Central Bank and the International Monetary Fund.
Hedge fund providers SkyBridge Capital is hosting the second annual SkyBridge Alternatives “SALT” Asia Conference. Timothy Geithner, 75th United States Secretary of the Treasury, will be speaking at the event along with other hedge fund luminaries. The conference will take place at the Marina Bay Sands in Singapore September 24-27, 2013.
