Fund flows surpass USD50bn despite lagging returns… funds eye HK-China mutual recognition scheme …
Hedge funds posted their second consecutive month of negative returns in April with the Eurekahedge Hedge Fund Index down 0.15 per cent as global markets continued to falter amid a sluggish start to the year. On a year-to-date basis, hedge funds are up 0.78 per cent, slightly ahead of the MSCI World Index, which has returned 0.75 per cent in the first four months of the year.
Global hedge funds were up 0.78 per cent year-to-date as North American, European and Latin American managers lead with gains of 2.16 per cent, 1.03 per cent and 0.38 per cent respectively. The Top 100 best performing hedge funds during the month posted average returns of 4.21 per cent, with long/short equities and CTA/managed futures constituting 72 per cent of these funds.
Japanese hedge funds were down for the fourth consecutive month although they have outperformed the Nikkei 225 Index by more than 10 per cent year-to-date, a significant outperformance.
Distressed debt, fixed income and arbitrage strategies lead the tables delivering returns of 2.98 per cent, 2.60 per cent and 1.61 per cent respectively in April.
Global markets produced mixed results during the month, largely remaining in headline-following mode as new macroeconomic data validated concerns regarding a slow start to the year. The Eurozone continued to post a recovery in economic activity, but a strengthening euro and below expectation inflation data remained a source of worry. In Asia, markets edged downwards on a slowing growth rate in China and doubts about the longevity of Abenomics, though emerging economies in the region held their ground despite the Fed’s QE taper. The larger hedge funds delivered better returns than their smaller peers during the month, with the asset weighted Mizuho-Eurekahedge Index outperforming the Eurekahedge Hedge Fund Index by 0.40 per cent.
Returns across regional mandates were mixed, with North American managers delivering their third consecutive month of positive returns gaining 0.12 per cent. On a year-to-date basis, the Eurekahedge North American Hedge Fund Index is up 2.16 per cent, outperforming the MSCI North America Index which has returned 1.66 per cent over the same period. Latin America focused hedge funds posted the strongest gains among all regional mandates, up 0.77 per cent as the Ibovespa rallied 2.33 per cent during the month. Emerging markets focused hedge funds were up 0.15 per cent outperforming the MSCI Emerging Market Index which lost 0.44 per cent at the end of the month, with a number of fund managers reporting gains from their exposure to Turkey – which posted healthy growth figures. Fund managers focused on Europe were down 0.59 per cent as the region’s long/short equities funds posted losses on the back of disappointing Q1 2014 corporate earnings data. Asia ex-Japan mandated funds were down 0.70 per cent, with managers investing in Greater China posting another month of disappointing losses of 2.27 per cent. Fund managers investing with a dedicated Japan mandate posted their fourth month of negative returns, losing 0.38 per cent and 2.15 per cent year-to-date as fund managers have struggled amid an appreciating yen – which has driven up demand for the currency denting exports and suppressing price level growth. It is however pertinent to note that Japan mandated hedge funds have outperformed underlying markets by over 10 per cent as the Nikkei has slipped 12.20 per cent in the first four months of the year.
The mutual recognition scheme that will allow Hong Kong to become a gateway to the whole of China has stirred interest among international hedge funds. Eyeing the country’s untapped USD6.6 trillion retail savings market, several major hedge fund managers say they are preparing to take advantage of a the scheme when it’s launched.
Max Gottschalk, co-founder and head of Asia-Pacific at Gottex Fund Management, a multi-asset Swiss-based fund of hedge funds, said: “If and when it does get agreed, I think mutual recognition could be transformational for foreign managers to raise capital in China. We are very pleased with the developments taking place.”
Andrew Seaman, partner at London-based Stratton Street, a fixed income hedge fund, said: “We’re certainly keeping our eye on developments with mutual recognition, as potentially it could have significant implications for the markets.”
International hedge funds have so far had limited access to Chinese investors. Last year, the Chinese government launched the strictly regulated Qualified Domestic Limited Partner programme, which allowed Chinese investors to make investments in foreign hedge funds for the first time.
So far, six hedge funds have been granted licences under the programme with a combined quota of USD300 million.
International hedge funds are hopeful that the mutual recognition scheme could provide another avenue into the country. Although the list of approved strategies has yet to be made public, market participants expect the regulators to allow only vanilla funds operated by established managers to participate, at least initially. Funds including derivatives or leverage will be excluded.
Man GLG, one of the world’s largest hedge fund managers is another institution looking to position itself to take advantage of the scheme. Pierre Lagrange, chairman of the Man Group Asia, said: “We’ve been onshore in Hong Kong for many years and hope to be one of the first movers under mutual recognition. However, even though [the agreement between Hong Kong and China] is approaching the finishing line, it may take longer than expected. Nonetheless, it’s helpful that Chinese regulation seems to be going in the right direction.”
Lagrange said the Chinese regulator might take into account the success of Ucits III funds in Hong Kong, which give Hong Kong investors access to liquid alternative strategies such as long/short equities. Certainly long-only equity funds would be top of the list, he added. “There could also be passporting opportunities for managed futures funds as the futures market is well-developed in China,” he said.
However, some investment consultants warn that hedge funds should not get ahead of themselves. Steve Baron, account executive at Z-Ben Advisors, a Shanghai-based investment consultancy, said hedge funds were unlikely to be explicitly excluded from the scheme, but added that their products might be last in line for approval – at least “in the first incarnation” of the scheme, he said.
Stratton Street’s Seaman said that, for the time being, his firm would look to access China through other cross-border investment schemes – most notably the Renminbi Qualified Foreign Institutional Investor programme.
The scheme, which allows funds to invest renminbi raised offshore in China, was extended to London managers in November. Seaman said the firm is awaiting approval for an RQFII license, adding: “Under the RQFII scheme in London it doesn’t require any link to Hong Kong. For now, that’s the route into China for us.”
Baron said an agreement between the Hong Kong Exchanges and Clearing and the Shanghai Stock Exchange, which will establish mutual stock market access between Hong Kong and mainland China, could provide an alternative route into China for hedge funds left out of RQFII and mutual recognition.
HSBC Holdings Plc ’s private bank unit, which invests USD25 billion in hedge funds globally, sees opportunities in backing new Asia-based managers, said Henry Lee, its regional head of alternative investment group.
Bloomberg reports that about 15 per cent of the managers in an HSBC program that provides capital to smaller hedge funds are based in Asia, Lee said in an interview with Bloomberg in Hong Kong yesterday. It has made early-stage investments in regional managers such as Hong Kong-based Zeal Asset Management Ltd., Myriad Asset Management Ltd. and Tybourne Capital Management (HK) Ltd.
HSBC is eyeing early-stage investments in Asia managers as rivals have reduced research staff in the region after the 2008 global financial crisis in attempts to cut costs, raising barriers for smaller hedge funds to expand assets.
“With less proprietary trading than before and less assets under management trading those hedge-fund strategies than before, Asia’s markets are providing an excellent playground for talented individuals to express themselves,” Lee said. While chances to back early-stage managers abound in the U.S. and Europe, “we feel Asia provides just as good opportunities and we are willing to spend time doing it.”
It’s cheaper to run a hedge fund in Asia where small hedge funds also find it difficult to raise capital, according to a report released by Citigroup Inc. in December. Fifty-seven per cent of the 167 Asia equity long-short hedge funds started with less than USD50 million still manage less than that amount after an average of 5.3 years in existence, according to data from Singapore-based Eurekahedge Pte cited in the report.
HSBC was an early investor in now multi-billion-dollar global hedge-fund managers such as Brevan Howard Asset Management LLP, Lansdowne Partners Ltd., Third Point LLC and Two Sigma Investments LLC, according to Lee. In 2011, it started a “next generation” program globally to invest in new hedge funds that have the potential of becoming future winners in an attempt to replicate the success of earlier ad hoc investments, he said.
Under the program, HSBC private bank invests in new managers with less than USD300 million in assets through a USD100 million fund-of-funds, he said. It is allowed to account for as much as half of a small fund’s assets, instead of the usual 10 per cent limit, he said.
The Segantii Asia-Pacific Equity Multi-Strategy Fund returned 8.3 per cent in April, its best monthly return since inception in December 2007, according to a performance update sent to investors.
The April gain helped the USD638.9 million fund advance 6 per cent in the first four months, according to the document from Hong Kong-based Segantii Capital Management Ltd.
Asia-focused hedge funds tracked by Singapore-based data provider Eurekahedge Pte on average lost 0.7 per cent this year through April, according to preliminary data. The Nikkei 225 Stock Average and the Hang Seng China Enterprise Index tracking Hong Kong-listed China-incorporated companies are among the 10 worst-performing primary stock indexes tracked by Bloomberg this year, amid concerns about the Chinese economy and Japan’s recovery as well as a selldown of technology stocks.
The Segantii fund trades Asian equities and equity-linked securities with a focus on North Asia. Segantii’s Chief Investment Officer Simon Sadler was a head of Asian equity trading for HSBC Holdings Plc’s regional securities unit.
In April, the relative-value strategy drove Segantii’s performance, returning 7.9 per cent, according to the newsletter, which doesn’t elaborate. The strategy exploits pricing gaps between different classes of shares of the same companies or shares quoted on different exchanges.
Eurekahedge Asia Hedge Fund Index slipped 0.3 per cent in April, according to preliminary data.
The Segantii fund ended six straight years of profits last year when it had a 1.7 per cent loss, according to the newsletter, underperforming the Eurekahedge Asia ex-Japan Hedge Fund Index’s 11.8 per cent gain. The fund has returned an annualized 13.8 per cent since inception, compared to 3.8 per cent for the benchmark Eurekahedge ex-Japan index, according to its newsletter.
Ken Xu, a former managing director at SAC Capital Advisors and Och-Ziff Capital Management Group LLC, is considering setting up his own hedge fund in Hong Kong, said a person with knowledge of the matter to Bloomberg.
Xu left SAC, now renamed Point72 Asset Management LP, earlier this month, said the person, who asked not to be identified as the information is private. His license with the company was removed on May 16, according to data posted on the website of Hong Kong’s Securities and Futures Commission. Jonathan Gasthalter, a spokesman for Stamford, Connecticut-based Point72 at Sard Verbinnen & Co in New York, declined to comment. Xu also declined to comment.
Xu may join others to tap institutional demand for Asia-based talent with experience managing money for Wall Street banks and global hedge funds. Highbridge Capital Management LLC ex-Asia head Carl Huttenlocher; John Ho, who ran the Children’s Investment Fund Management UK LLP’s regional operations, and Eashwar Krishnan, former Asia head of Lone Pine Capital LLC, have raised more than USD5 billion for their own funds in the last four years.
Xu spent three years in SAC’s Hong Kong office, according to the SFC license record. He was a managing director and fund manager focused on Asia long-short equity investment at the firm, according to his LinkedIn profile.
Before that, he worked for four years at Och-Ziff Capital Management, according to the SFC record. He was a managing director and co-head of Greater China equity long-short investments before leaving in October 2010, according to his LinkedIn profile.
Investors in a Deutsche Bank AG survey conducted in December ranked India and Asia excluding Japan among the five-most difficult regions to allocate money to hedge funds.
Steadview, an India-focused hedge fund seeded by Goldman Sachs (Asia) chairman Mark Schwartz, has made 12 times the returns of peers with bets on consumer and tech stocks, helping the fund grow its assets to USD500 million in nearly five years.
Founded and managed by Hong Kong-based Ravi Mehta, a former Morgan Stanley banker, Steadview's success stands out among Indian hedge funds who have seen their collective assets plunge by more than 50 per cent to USD2.4 billion since the 2008 financial crisis, according to data from Eurekahedge.
Schwartz actually backed the fund after he had left Goldman in 2001. He returned as chairman of Goldman Sachs Asia Pacific in 2012, according to a statement from the bank.
Mehta, a former analyst at hedge fund Maverick Capital in New York, said the outcome of Indian general elections has no bearing on how he invests, but domestic consumption and capital expenditures by corporates may pick up if the next government gets a strong mandate as there is pent up demand in the economy.
Indian shares have hit all-time highs for three consecutive trading sessions on optimism the opposition Bharatiya Janata Party led coalition could get a majority in the elections that ended this week. The results are due on Friday.
Mehta's fund has generated a 131 per cent return since its launch, while the India share index is up about 22 per cent in dollar terms in the same period. India hedge funds as measured by the Eurekahedge have returned 11 per cent.
India has become a dominant global player in software and drug exports, leveraging its vast pool of engineers that grows by 1.5 million every year. High-end manufacturing is going to be the next sector to achieve global competitiveness, Mehta said.
Motorcycle maker Eicher Motors Ltd is among the companies in which Mehta invested. Eicher's Royal Enfield motorcycles, a bike brand similar to Harley-Davidson, has 95 per cent market share in that segment and over 40 per cent return on capital, he said. It's joint venture with Volvo AB will be producing engines for Volvo's trucks, sourcing engines from India instead of Germany.
Mehta is also focused on manufacturers that are ramping up exports or reducing imported manufactured items. Kitchen appliances maker TTK Prestige Ltd is one such company, which has cut down on imports from China.