As battle-hardened hedge fund marketers know, hedge fund strategies go in and out of favour with regularity. Sometimes a change in investor tastes is driven by recent performance, and sometimes it’s caused by a perception that the underlying drivers portend a possible reversal of fortune (e.g. a dearth of mergers for merger arb managers). And sometimes this shift is compounded by what many see as a secular decline in the strategy itself – even though the secular usually turns out to be cyclical after all is said and done.
The Asian hedge fund industry seems to have undergone such a reorientation over the past year. This, according to a report from Singapore-based consulting firm GFIA (available on the firm’s website with free registration here). As an investment advisor, GFIA takes data collection pretty seriously and suggests that the data contained in regular hedge fund databases may not be quite complete due to “misclassification and survivorship bias.” So we were interested to see the real story behind the Asian hedge fund industry.
Nearly a quarter of new Asian hedge funds last year were either multi-strategy funds or were rather counter-intuitively named “long-only” hedge funds. Despite the category’s impressive showing, 2010 was actually a below-average year for long/short fund creation. As the chart below from GFIA illustrates, the proportion of long/short funds in Asia has been falling for at least three years (long/short is represented by the big beige portions of the doughnuts below).
If you look closely at the shifts each year, you may have noticed that “long-only” has been growing each year since 2007 – just as long/short has been falling. Most other strategies remained stable. We isolated the long-only and long/short categories in the chart below. You can see the apparent trade off between the two, especially in 2010.
As GFIA’s Peter Douglas explained to AllAboutAlpha.com via email:
“We’re seeing a mini-renaissance in unconstrained long-only funds at the moment. I think it’s partly a response to commercial dynamic (long/short equity is arguably over-supplied, while capacity in skill-based long-only funds has decreased over the last decade), and partly that Asia has becomes a core allocation for global allocators. These allocators are thinking more carefully about what they want from Asia, and, if you want the Asian growth story and you’ve accepted that volatility will be higher than other regions, then you might as well pay lower fees and gain all the upside rather than higher fees (to mitigate volatility with which you may be comfortable anyway). Remember, too, that there are 20,000 or so listed equities in the region, with sell-side coverage of roughly 10% of that number. So the opportunities to create alpha from good stock-picking are substantial. Asia’s not the place to invest through ETFs.”
Long-only wasn’t the only strategy to experience a growth year last year in Asia. The chart below (also created with data from the GFIA report) shows the ratio of the proportion of new launches over the proportion each strategy represented at the end of 2009. As you can see, fixed income was also over-represented in the freshman class of 2010 while macro and multi-strategy were under-represented (vs. their YE 2009 proportions).
So what’s the result of this apparent shift in Asian tastes? According to GFIA this makes the market more “heterogeneous” and mitigates the recently-reported tendency of Asian hedge funds to cluster around the same risk factors. In fact, GFIA expects that the recent jump in the correlations of Asian hedge funds (see related post) will give way to more return dispersion as a result.