How layoffs in the Asian banking sector might be a boon for hedge funds

23 Feb 2009

We are broadcasting on location this week from Hong Kong where the hedge fund industry has recently undergone a convulsion that could either spell either disaster or a new era of opportunity.

It has been widely reported that Asian hedge funds have been skewered by the recent pullback in the hedge fund sector (example).  But the South China Morning Post contained an interesting piece yesterday on how financial services layoffs may flood the hedge fund sector with talent and entrepreneurial energy of which it could only have dreamed a year ago (article also available here via Lexis/Nexis to HedgeWorld subscribers).

Says the paper:

“As job losses swell in Hong Kong’s financial sector, many laid-off investment bankers are claiming – between sips of hard liquor and calls to headhunters – that they are about to launch a new investment fund.

“This is usually more optimism than reality. But a few local former bankers are indeed set to raise about $1US.5 billion between them after convincing battered local and international investors to back them in new private equity or hedge fund ventures.”

“..These start-ups have attracted investors who became exasperated with the performance of established local hedge funds.”

And things are about to become more difficult for existing “local hedge funds”.  As the SCMP also points out, the new hedge fund bill making its way through the US Congress could force any hedge fund with at least one US client to publicly disclose its performance:

“If the performance has been bad, a Hong Kong manager does not have to lose face beyond his small circle of wealthy clients.

“The proposal, put forward by senators Chuck Grassley and Carl Levin, is being dubbed the ‘hedge fund embarrassment bill’.”

Dow Jones reports on one such manager, Mark Fuchs, who until last June was a bigwig at Credit Suisse and had been instrumental in setting up CS’s equity business in Southeast Asia.  Fuchs tells Dow Jones that falling valuations and market dislocations have created an unprecedented opportunity.  While this sounds like a long-only opportunity, Fuchs is launching a long/short fund.  And while China and India are obviously the big stories, he notes:

“Everyone is investing in China and India because of the China-India story…But they (India and China) have an impact on the region’s growth as well.”

But you don’t have to be a former CS bigwig to launch a new fund in the region.  Asian Investor reports on one Hong Kong-based hedge fund seeding operation that is hoping to cash in on the talent being let go by large financial services players.

Paul Smith of Triple A Partners tells the magazine:

“It’s a great time to be a seeder. Pricing power is on the seeders’ side as there is not much capital around. Secondly, there is a lot of talent around and that’s not just people who have been laid off. Thirdly, the opportunities for investment returns have never been better as so much capital has left the market and the upside is so much greater.”

Truth or marketing hype?  We are meeting with various players in the local alternative investment community this week and will let you know what’s being said about this and other trends in the Asian hedge fund business.

Meanwhile, in other Asian hedge fund news…

No performance fees for 80% of Asia hedge funds: “More than 80 per cent of Asian hedge funds won’t be able to charge their investors performance fees after finishing 2008 below their peak net asset values, according to data provider Eurekahedge.”

Asian hedge fund industry contracts in “more pronounced” manner: “Capital invested in Asian hedge funds continued to fall in the fourth quarter of 2008, according to data released on Monday by Chicago-based Hedge Fund Research…Despite full year performance losses for 2008, Asian hedge funds posted gains in December and some Asian equity markets have posted strong gains to begin 2009,” said Kenneth J. Heinz, president of Hedge Fund Research.”

India-focused hedge firms worst hit in Asia: “The shrinking returns from hedge funds have hit the investors’ confidence leading to the shutting down of many Asia focused funds. The India-focused funds were among the worst hit as the combined assets of 70 hedge funds have decreased by two-thirds in 2008.”

Ex-Citadel Manager Returns 18% With Atom Japan Fund: “Atsuko Tsuchiya, the Japanese hedge-fund adviser who left Merrill Lynch & Co. to found her own firm, led Atom Japan Equity Fund to an 18 percent return in 2008, beating rivals who suffered the worst year on record.”

Bleak times for the funds of hedge funds: “Funds of funds in Asia have underperformed the broader hedge fund indices for the region. But global funds of funds have underperformed global indices by a larger margin, according to returns data compiled by Eurekahedge in Singapore…Asian hedge funds lost 20.7 per cent in 2008, and the 90 funds of Asian funds that Eurekahedge tracks lost 22.4 per cent on average. In comparison, hedge funds globally lost 12.5 per cent and funds of global funds returned -19.6 per cent.”

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