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Syz Asset Management sees value in Asia hedge funds

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According to last year's Preqin Global Hedge Fund Report, Asia Pacific's hedge fund industry had USD159 billion in AUM and the largest allocator, with USD29.9 billion of committed capital, was China Investment Corporation (China's Sovereign Wealth Fund). 

In total, there are an estimated 1,709 active hedge funds being managed in the region, and whereas last year's performance relative to the global hedge fund industry was disappointing (1.76 per cent compared to 5.40 per cent), over a three-year period Asia hedge funds have outperformed the US and Europe, returning 6.84 per cent compared to 5.49 per cent.

These facts have not been lost on Achraf Goneid, Senior Analyst at Syz Asset Management. 

The firm's Oyster Alternative Funds of Hedge Funds which invest in portfolios of 30 to 40 hedge fund managers, have traditionally focused their attentions on the US and Europe. Back in 2013 there were four Asia hedge fund managers in the books, but these were gradually divested for various reasons and a more thorough, detailed appraisal of Asia hedge funds was embarked upon. 

"If you look at stock exchanges by size you will notice that the US is the largest, followed by Asia Pacific and then Europe. For me this was a little counterintuitive because two thirds of our managers were based in the US, just under one third were based in Europe and a very small number were based in Asia. To my mind, this was a very Eurocentric way of looking at things. 

"Whilst it is true that asset management in Asia started later than the US and Europe, we believe that Asia has now matured into a very good hedge fund industry and offers enough depth for us to look more closely at it," explains Goneid. 

One of the issues that European allocators have had with Asia hedge funds is the terrible performance they suffered in 2008 in the wake of the financial crash. Many so-called hedge funds were nothing more than glorified long-only funds with little evidence of skill-based performance. That is now changing. 

"We spend a lot of time speaking to Asia managers that are trading with much less market directionality and they are becoming alpha generators in the truest sense.

"The managers that we see today are people that have spun out of existing hedge fund managers or large prop desks that have a very similar background to some of their top-notch European and US peers. They are well trained, well educated and have tremendous experience in the region. They aren't trading the same markets, so by design they have the potential to provide decorrelated return streams than you can't get merely by investing with western managers," says Goneid.

This ability to generate alpha in different markets is helped by the fact that Asia's markets are far less orderly and efficient as those in the West. That inefficiency creates trading opportunities. What's more, as Goneid points out, Asian investment banks sell structured products to retail clients, and because they cannot keep the risk on their book they then sell the associated derivatives to hedge fund managers at a discount. This creates additional trading opportunities for managers that their US and European peers don't necessarily have access to. 

"There is a lot of disintermediation in Asia (IPOs, block trades) which you also see in the US and Europe but this seems to lead to a greater impact on returns in Asia," states Goneid, who explains that as part of the process of building portfolios that are robust and capable of offering diversified sources of returns, Syz Asset Management views Asia with increasing importance.

"We are more interested in the types of trades that a manager does as opposed to just looking at a manager who has returned 20 per cent per annum as performance can be difficult to forecast. We want to understand the discipline of the manager in terms of where he tries to capture returns. This is easier to assess. When we build portfolios, we try to think out of the box. I think we are one of the few hedge fund investment groups in Switzerland that still travels regularly to meet managers in Asia."

Many of Asia's current generation of hedge fund managers have attended US and UK universities and their overall approach to stock picking and trading global markets is broadly similar. So whilst the fundamentals are the same, the difference is how these managers view the markets from a top-down perspective.

Goneid confirms that when he joined Syz Asset Management in 2013, the firm had allocations to four or five Asia managers but the problem was that some were Mandarin speakers only, and the strategies they were running were broadly similar.

"Since that time we've engaged in a careful process of going to Asia to meet a lot of different managers, understand their investment strategies, and now we have started to re-allocate. For a very long time we focused on the equity long/short space but now we are looking more closely at relative value and macro strategies. 

"Early on we were attracted by the decorrelation benefits that Asian equity markets had to offer and we benefited from this. Now we are looking to do something similar with our RV and macro allocations. We are in the process of onboarding one new manager and there could be space for one or two more later in the year, which would bring our Asia manager allocation back to where it was previously," explains Goneid.

He says that the manager currently being onboarded is an Asia multi-strategy manager with a Japan activist tilt. 

"We think the changes happening in Japan could produce some significant tailwinds. We liked the operational set-up of this manager, the process they have in place, and the return stream that they can offer. 

"As the talent pool in Asia deepens, there will be more opportunities to find new talent, especially as third generation fund managers start emerging. A lot of the managers we've been working with for a long time in the US and Europe are closing their funds to new capital. As we attract new investor inflows it means we aren't able to allocate to these existing managers and this is prompting us to seek out the next generation of talented managers; not just in Asia, but globally," remarks Goneid.

When asked what Syz Asset Management's investors sentiment is towards Asia hedge funds, Goneid says that whilst most investors like to hear about the large blue-chip names in the industry, they understand that Asia is becoming a future powerhouse for investing and appreciate the decorrelation attributes on offer.

"Asia managers aren't doing the same trades as those in developed markets where more managers suffer from being crowded in similar trades. It's a more nuanced approach. When we look at managers we have to be certain that they speak English and we also look very closely at how they operate from a compliance perspective; especially managers based in Mainland China where the regulatory environment is different. We have very strict rules on this. 

"Overall, we believe that Asia hedge funds face fewer competitive hurdles than those in the US and Europe, and can benefit from operating in markets that are maturing but remain inefficient," concludes Goneid. 

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