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Editor’s note: Asia outlook for 2011 and beyond

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The first six months of 2010 were tough for Asian hedge funds.

The first six months of 2010 were tough for Asian hedge funds. Most notably the 4.26 per cent loss they incurred in May when a double whammy of soaring sovereign debt concerns in Europe and the Flash Crash caused the MSCI Asia Pacific Index to fall 9.8 per cent. Despite recovering in Q3 and Q4, overall returns were fairly muted: approximately 8.77 per cent, underperforming the aforementioned index which gained 10.96 per cent. Despite the strong headwinds of last year, 2011 should be more conducive to generating alpha. Global M&A activity is forecast to rise 36 per cent y-o-y, so expect to see more strategic rather than “must-do” deals, particularly in emerging markets. In the opinion of Matt Miller, editor of The Deal, “the real action will come from Asia”.

I believe event-driven strategies pursuing merger arbitrage opportunities could go from strength-to-strength in 2011, with capital restructuring arbitrage also likely to yield fruit. CTA/Managed Futures, one of the best performing Asia ex-Japan strategies last year (+13.40 per cent) are likely to continue attracting institutional assets, and given what’s happening in Japan right now with respect to its USD719billion corporate pension pool, I wouldn’t be surprised to see Managed Futures attracting significant interest; the diversification and transparency they offer cannot be underestimated.

Startup hedgies in Asia did well in 2010 and I don’t see this changing; in fact I expect to see numbers increase even further as the wave of ex-prop traders entering the market steadily grows. Admittedly, average fund size was small (about USD10-12million) in what were incredibly tough capital raising conditions, but now that the major Asian-based heavyweights are beginning to reach capacity, having secured the lion’s share of inflows, 2011 could be the year when investors start to diversify and allocate into more aggressive alpha generating funds with less of a well-established “brand name”. The one challenge I do anticipate for startups, however, is getting the operational and client servicing sides of their funds in good order: due diligence will be more thorough than ever.

And then we come to Morgan Sze (pictured) and his Azentus Fund: one of the most exciting fund launches Asia has witnessed. Assuming it launches with the expected USD1billion to USD1.5billion in startup capital in Q1, it will become Asia’s biggest-ever hedge fund. This could act as a catalyst for more significant fund launches in Hong Kong and Singapore as fund managers continue to be squeezed by tougher tax and regulatory conditions in the US and Europe. Without question, Sze’s Azentus Fund will put Hong Kong firmly on the map.

I’d like to finish with a comment on China. As the People’s Bank of China continues to strengthen its market regulations, this will, in my opinion, be the decade when we see major hedge fund launches coming out of Shanghai. It’s very early days, but once the RMB starts to find fair value and China’s RMB capital markets steadily deepen, the mainland’s fund market will blossom. Shanghai has the potential, this decade, of challenging Hong Kong and Singapore to become the “New York of Asia”. It’s a case of when, not if, this happens.
 

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