Hedge funds see USD18bn outflow in Q3 despite steady returns… India’s SEBI confirms ban on HK’s Factorial Capital Management…

Hedge funds outperformed underlying markets in September with the Eurekahedge Hedge Fund Index returning a flat 0 per cent while the MSCI World Index finished the month down 1.86 per cent. On a year-to-date basis, hedge funds are up 3.87 per cent, falling just slightly behind underlying markets as the MSCI World Index returned 3.99 per cent over the same period.

Despite this, redemption pressure builds up in hedge funds following three consecutive months of net asset outflows as investors withdrew USD13.3 billion from global hedge funds in Q3 2014.
 
Investors are gearing up in earnest at the prospect of tighter monetary policy in the US as economic recovery continues to gain strength, along with remaining concerns regarding the pace of a rate rise given the mammoth challenge of unwinding the Fed’s balance sheet. In the meantime, the ECB surprised market participants by embarking on further easing, cutting interest rates another 0.10 per cent and announcing targeted long term refinancing operations (TLTRO), driving the euro down to a two-year low against the greenback. Meanwhile in Asia, mainland Chinese stocks were among the best performers in Asia amid speculation that an economic slowdown would be stemmed by government reform measures and an exchange linkup with Hong Kong that could fuel further capital inflows.
 
Japan focused hedge funds were the only regional mandate to report positive returns in September, gaining 0.76 per cent as underlying markets in the region rallied on speculation that reviews to Japan’s government pension investment fund (GPIF) would increase its allocation to the country’s equities. The benchmark Nikkei 225 index rose 4.86 per cent during the month. Eastern Europe and Russia was the hardest hit region as sporadic fighting continued to break out despite an official ceasefire and the west imposed a fresh batch of sanctions against Russia. This had a negative impact on the rouble and also equities in the region, with the Eurekahedge
 
September saw a sharp rise in investor risk aversion, resulting in a corresponding flight to safe assets. The CBOE VIX Index; a measure of investor fear, rose 34.90 per cent to 16.31 during the month. Divergence in economic policies between the major central banks drove much of the currency trends for September, with the US dollar being the biggest winner. The strong dollar also put heavy pressure on commodity prices and driving down energy prices. CTA/managed futures managers posted the largest gain out of all strategic mandates at 2.47 per cent from their exposure to short energy and long US dollar positions. Arbitrage and macro strategies also posted positive returns with gains of 0.36 per cent and 0.24 per cent respectively. On the other hand, fixed income as an asset class was hit hard by expectations of interest rate hikes. Bonds across all categories saw a fall in prices, with junk bonds seeing the biggest sell-off. Distressed debt strategies lost 2.24 per cent while the Eurekahedge Fixed Income Hedge Fund Index fell 0.60 per cent, their biggest monthly loss in 2014 so far. Long/short equities also reported losses of 0.96 per cent, coming under pressure due to global equities as a whole retreating in September. The protests in Hong Kong towards the end of the month weighed in on investor sentiment, adding further selling pressure to equity markets which were already jittery at the prospect of rising rates.
 
Macro hedge funds, the worst performing strategy in Asia this year, are showing signs of a turnaround after markets were roiled in September reports Bloomberg.

The USD3.1 billion Dymon Asia Macro Fund advanced 2.9 per cent in September and returned 13 per cent this year through Oct. 10, according to a person familiar with the performance. The USD90 million macro hedge fund of Hong Kong-based Guard Capital Management Ltd., which focuses on currencies and interest rates, rose 11 per cent last month, extending gains in its first two months of trading to 12 per cent, said a person with knowledge of the fund.
 
Price swings have returned to markets, especially in currencies, as a U.S. economic recovery raised the prospects of interest rate increases and monetary policies in the U.S., China, Europe and Japan will diverge. Macro funds, which can bet on stocks, bonds, commodities and currencies, and seek to profit from broad economic trends, were among the best performers in September with a gain of 1.1 per cent, according to data compiled by Bloomberg.
 
Asia macro hedge funds lost 1.7 per cent in the first nine months, even after a 1.6 per cent gain in September, according to preliminary data from Eurekahedge. The year-to-date number is the lowest among nine Asia strategies tracked by the Singapore-based data provider, according to information posted on its website. The region’s hedge funds on average returned an estimated 4.5 per cent in the first nine months.
 
Macro investing has lagged in the region. The strategy accounts for 3.3 per cent of Asia industry assets, compared with almost 19 per cent globally, according to data from Chicago-based Hedge Fund Research Inc.
 
That dearth has inspired former bank traders and economists to set up funds to profit from the opportunities created by the region’s diverse economies and markets. In addition to Guard, former HSBC Holdings Plc economist Geoffrey Barker started Counterpoint Asia Macro Fund with City Financial Investment Company (Hong Kong) Ltd this year.
 
The JPMorgan Global FX Volatility Index, a measure of the magnitude of currency market swings, rose to 7.86 per cent on Sept. 30, from a record low on a closing basis of 5.29 per cent on July 3.
 
Dymon, based in Singapore, was co-founded by Chief Investment Officer Danny Yong, a former Goldman Sachs and Citadel LLC trader. Fortress’s Asia macro funds, which managed USD3.1 billion at the end of June, are led by Singapore-based Adam Levinson.
 
The September performance may help Asia macro hedge funds gather assets. Guard’s assets under management have increased from USD50 million when it started trading on Aug. 1, said the person.
 
Investors pulled about USD16 billion from such funds globally between the end of 2012 and June of this year, according to data from HFR.
 
The Securities and Exchange Board of India's (SEBI) confirmed its ban on Hong Kong-based hedge fund Factorial Capital Management Ltd on Thursday, saying the fund had not been able to disprove insider trading charges levelled against it earlier this year.
 
The SEBI ban is the latest in a series of actions by the watchdog to crack down on rogue trades and wayward companies, in a bid to boost investor confidence in Indian capital markets.
 
The case against Factorial is SEBI's first major probe against a foreign investor in Asia's third-largest economy. In an interim order issued in June, SEBI banned Factorial on suspicion the hedge fund short sold securities in L&T Finance Holdings Ltd, an Indian financial services firm, based on inside information.
 
SEBI said then that Factorial had built short positions in L&T Finance derivatives - effectively betting on a decline - before the announcement of a sale of company shares in mid-March, netting a profit of 200 million rupees (USD3.23 million). Factorial, in its submissions to the regulator, had asked for the ban to be lifted, claiming that its trades in L&T Finance were "based on high conviction, and fundamental and technical analysis" - not insider information.
On Thursday, the regulator dismissed Factorial submissions, saying that the fund has not been able to provide sufficient evidence against the charges.
 
According to Indian rules, entities alleged to have broken rules can seek a revocation of ban and penalty during the investigation period, but Thursday's order means the fund will not be allowed to trade until SEBI delivers its final decision in the case, which could involve a monetary fine.
 
The fund had also claimed that since the interim order was passed without giving it an opportunity to present its case, SEBI should lift the ban during the investigation period.
 
Hedge fund manager Man Group has managed to attract clients to its funds in the last three months during a turbulent quarter in the world markets.
 
Man Group’s funds under management rose 25pc to USD72.3bn (£45.2bn) in the three months to the end of September. The recent purchases of Numeric and Pine Grove together added USD16.2bn to the firm’s assets, while an unnamed institutional investor in Asia handed USD1.6bn to Man's flagship AHL investment funds.
 
The firm brought in USD400m in net new customer money in the quarter. Clients were drawn to AHL's computer-driven quant funds and long-only strategies, Man said.
These investments typically command lower fees than Man's guaranteed products and discretionary alternative strategies, which lost customers in the quarter. Many of the discretionary funds became part of Man Group during its tie-up with GLG Partners in 2010.
 
In a period when the FTSE All-Share index dropped 3.6pc, Man Group said its funds made USD900m from their investments, or a gain of nearly 1.6pc. However, this was more than wiped out by currency movements, which knocked USD2.9bn off Man’s funds in the period. The results were ahead of most forecasts. Analysts had predicted funds under management of USD71.7bn and net outflows of USD0.3bn, according to consensus estimates provided by the firm.
 
Guard Capital, a macro hedge fund firm launched by two former top traders at Goldman Sachs and Noble Group in August, gained 11.2 per cent last month as its currency and interest rate bets paid off, a letter to investors obtained by Reuters showed.
 
The Guard Macro Master Fund, which bets mainly on the currency and interest rate markets, outperformed a 1.8 per cent gain in the HFRI Macro Index in September.
The Hong Kong-based hedge fund firm was launched in August by Leland Lim, the former co-head of macro trading for Asia Pacific ex-Japan at Goldman Sachs, and Allan Bedwick, who was the head of macro trading in Asia for Noble Group.
 
The Segantii Asia-Pacific Equity Multi-Strategy Fund returned 29 per cent in the first three quarters after having the best month since its 2007 inception in September, according to an update sent to investors.
 
The fund led by Simon Sadler, a former head of Asian equity trading at HSBC Holdings’ regional securities unit, gained 12 per cent in September. Trading profits helped boost assets of the fund to USD878.2 million from USD638.9 million at the end of April, according to the document seen by Bloomberg News.
 
The Hong Kong-Shanghai bourse linkage plan announced by China in April will for the first time allow foreign investors to trade Shanghai-listed Yuan stocks without a qualified foreign institutional investor quota from the regulators. Hedge funds have attempted to profit from the pricing gap between shares quoted on the two exchanges before the link’s anticipated start this month, which is expected to reduce the difference over time. The Hang Seng China AH Premium Index swung between 92.6 to 100.4 during the month, with 100 indicating equal value.
 
The Segantii fund trades Asian equities and equity-linked securities with a focus on North Asia. It dropped 1.7 per cent last year, the only annual loss since inception in December 2007. It has returned an annualized 16 per cent since inception.