Asian Fund Industry
KEN HEINZ, HFR
Issue 38, June 2008

http://www.thehedgefundjournal.com/research/index.php?
articleid=77465986


Assets invested in hedge funds focusing on Asia declined by
approximately 10% in the first quarter of 2008, representing only the
latest chapter in the development of the Asian hedge fund industry.
As is frequently true with regard to both investing in hedge funds
and investing in Asia, the details become more interesting as they
become more clearly understood. Assets invested in Asian hedge funds
fell from over US$111 billion at the end of 2007 to just over US$100
billion, which, combined with the negative performance and ceteris
paribus (all else being equal), is likely to have constituted a
market development eliciting collective investor capital withdrawals.
Yet investors actually allocated an additional US$1 billion to Asian
hedge funds, only partially offsetting the negative performance
impact in total hedge fund assets in Asia.

The growth and concentration of capital, as well as the combined and
intertwined influences of both emerging and developed economics in
such close geographic proximity, are only two of the factors which
suggest the potential for substantial growth in the Asian hedge fund
industry. As a testament to the divergences of economics between
developed and emerging and their implications, it is relatively well
known (but bears restatement for context) that since the very early
days of hedge fund industry development (1990) through to the
present, an investor in the Nikkei 225 would have lost over 5%
annualised. It is also well known that an investor in Emerging Asia
(results vary by specific index) generally would have at least
doubled their investment in the last few years, in some cases,
returning greater than 100% in a single calendar year. Clearly the
divergences in performance and across the regions and time periods
represent an opportunity for long and short investing, ceteris
paribus.

Industry estimates of the Asian hedge fund industry are based on the
strategic focus of each fund and not on the geographic exclusivity,
firm location or legal domicile of the hedge fund structure. It is
interesting to note that more than half of the funds which comprise
the Asian hedge fund industry are themselves located in Asia, with
the balance being located in the US and UK. Progressive structural
characteristics have contributed to the development of the industry
located in Hong Kong, Singapore and Australia over the past few
years, with fewer funds currently located in China or Japan. A recent
softening in attitudes towards hedge funds has also been seen from
countries such as South Korea.

Indicative of the early stage of development of the Asian hedge fund
industry, the industry is significantly less concentrated than the
broader hedge fund industry, with slightly less than 1/3 of Asian
hedge funds with assets of more than US$1 billion under management,
while the overall industry has greater than 70% of assets in funds in
excess of US$1 billion in size. On a broader scale, while the Asian
region represents over 20% of global assets, the region represents
nearly 21% of global bank assets (Milken Institute) but the Asian
hedge fund industry represents only approximately 5% of the capital
invested in hedge funds. Smaller still and with greater potential,
the overall industry represents approximately 1% of global financial
capital, while capital invested in Asian hedge funds represents only
0.25% of total Asian financial capital. Ceteris paribus, the scope of
opportunities is significant on a global scale.

The Asian hedge fund industry is composed of nearly 2/3 equity hedge
strategies, a stark contrast to the broader industry (1/3 equity
hedge) in a period where equities lost over 20% across Asia. Viewed
within this context, the broad relative overweight that the Asian
hedge fund industry has toward equity hedge, at an aggregate level,
accentuated losses for the industry. Similarly, the Asian hedge fund
industry has approximately half of the exposure of the broader
industry to macro strategies. Over a trailing 6 months period (ending
Q1 08) during which both global and Asian equity markets fell
precipitously, macro funds gained nearly 11%. Macro gains offset
losses across the total industry through short US dollar, long
commodity and long government fixed income, while remaining
relatively neutral, in an aggregate sense, to broader credit and
equity market weakness. The Asian hedge fund industry received a much
smaller benefit of this trend in macro performance, further
accentuating the performance volatility.

Prior to the weakness of Q1 08, investors in Emerging Asia over the
last three years may have become complacent with gains ranging from
steady to strong and with only few, isolated and temporary instances
of weakness, none of which were protracted. With the recent
volatility serving to recalibrate some of these assumptions, two
qualities exhibit compelling characteristics from an investor's
perspective, which are likely to serve as a catalyst for the
continued development for the Asian hedge fund industry, ceteris
paribus. First, the ability to invest long and short provides the
opportunity to reduce individual portfolio volatility and minimise
correlation with other asset classes and markets. Secondly, the
inverse relationship exhibited between macro strategies and volatile
equity markets also presents a noteworthy portfolio dynamic. As the
expected volatility pattern for Asian investors shifts from being one
of primarily positive volatility to a more normally and evenly
distributed pattern of positive and negative observations, Asian
investors are likely to view the ability to invest long and short
across diverse strategies as a compelling diversification tool