Meeting Tomorrow Today

Meeting Tomorrow Today
ASIAHEDGE FORUM
AsiaHedge Forum 2011: Report
Meeting Tomorrow Today:
After the tsunami
Taking place in the shadow of the devastating Japan earthquake and
resulting markets meltdown, the AsiaHedge Forum served as a platform for
the international hedge fund community, top allocators and policy makers
to debate strategies not just for rebuilding portfolios in the wake of this
major event, but also strategically to harness the growth potential of the
geo-political and economic powerhouse that Asia is turning out to be
The AsiaHedge Forum 2011 came at a time
when the eyes of the world were on Japan,
as it reeled from one of the biggest earthquakes in recorded history, the subsequent tsunami and a nuclear power station perilously close to meltdown.
Not surprisingly then, Japan was a major
topic of conversation both on stage and off
for the duration of the two-day event. But
beyond Japan, panellists and keynote
speakers also covered all the hot-button
topics for the Asian hedge fund industry,
from the macro-economic backdrop to micro strategies, and from attracting the largest global allocators to coping with new
regulatory requirements in key markets.
Sponsored by
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08-17 Forum.indd 9
There were 11 diverse panel sessions,
bringing together both managers and investors to discuss where the money is coming
from and how it is being deployed, as well as
three top-notch keynote addresses from Don
Hanna of Fortress Investment Group, John
Ho of Janchor Partners, and John Tsang, the
Financial Secretary of Hong Kong.
Associates
April 2011 9
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ASIAHEDGE FORUM
Meeting Tomorrow Today
The macro-economic climate: Which way are the macro-economic
winds blowing globally and what tidings do they bring for Asia?
Panellists
Frank Brochin, Stonewater Capital
Monica Hsiao, CQS
Brenda Tse, Permal Group
Rachel Ziemba, Roubini Global Economics
Moderator
Kirby Daley, Newedge Group
The first discussion of the Forum zoomed
straight in on Japan. Rachel Ziemba of Roubini Global Economics spoke for the whole panel when she said that everyone was grappling
with what macro effects of the disaster would
be. “In GDP terms the effect might be lower
than that of the Kobe earthquake, but what we
don’t know is the effect on nuclear power and
power sources for Japan in future,” she said.
Permal Group’s Brenda Tse noted that the
yen appreciated 20% after the Kobe earthquake. “The Bank of Japan will repatriate a lot
of money, but long-term I think the yen will
The macro panel from left: Frank Brochin, Monica
Hsiao, Brenda Tse, Rachel Ziemba, Kirby Daley
depreciate. It might affect some of the Japanese long/short equity managers and we are
researching several areas in Japan so we can
capitalise on opportunities there.”
Broadening the discussion to the global macro-economic situation in 2011, Stonewater
Capital’s Frank Brochin observed a shift in
sentiment this year, with money flowing back
to the US and Europe and being taken away
from emerging markets. “We think this is fundamentally the wrong bet, that growth has
come back in developed markets, while the
fundamental situation in Europe and the US is
still very fragile,” he said.
On the credit side, the outlook is relatively
positive even in sectors like Chinese property
which is easy to dismiss due to tightening regulations, said Monica Hsiao of CQS. “I am generally positive about relative value in Asia and
we expect money to flow back into emerging
markets later in the year.”
In the current environment, investors
need to stop indiscriminately investing in
emerging-market countries and recognise
the differences between countries, said
Brochin. “For example, in Latin America urbanisation is not a big driver for growth in
the way it is in China.”
KEYNOTE SPEECH: Don Hanna, Fortress Investment Group
Don Hanna, managing director of global liquid markets
research at Fortress Investment Group, gave his erudite
views on the most pressing macro-economic issues of the
day – inflation, oil prices, and, of course, the disaster in Japan
Hanna started out by saying that it is these
kinds of events that make macro-economics
complicated and exciting. Last November,
Fortress saw that there were inflation-related
opportunities in rates, currencies and equities.
At that point, the most obvious countries that
were sitting on their hands relative to the pace
of inflation were Indonesia and India. In terms
of equity markets, the firm made a distinction
between developed countries where some
inflation could be beneficial, for example, the US
or Russia, and other countries where the primary
influence would be monetary-policy tightening.
Hanna noted that he also had exchange rate
views that went across the spectrum from
benign to virulent. There was China, where his
view was that there is likely to be a modest
amount of currency appreciation. Then there
were places like Malaysia, where the central
bank had been more aggressive earlier in the
year. The difficult call, he noted, was Korea,
where a lot of people had been betting on
currency appreciation over the course of 2010
– something that did not come through.
The other major market in which Fortress
was playing was Brazil because it is a proxy for
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08-17 Forum.indd 10
emerging markets for many Americans. That
was going to hurt Brazilian equities, he said.
That sentiment until around Chinese New Year,
Hanna noted, and part of what shifted in that
period was that central banks surprised the
market with the degree to which they were
willing to adjust their policies.
The other big complication to this inflation
trade has been the Middle East. “The big
surprise has been this disruption in supply. How
does this impact on the inflation trade? The
fundamental issue is that Saudi Arabia can
only expand its output to full capacity,” he
remarked. “If another element of the market
goes out, then we’ll have the price dynamics we
saw in 2008 when the market can’t adjust by
supply and has to adjust by price.”
Higher oil prices also add greatly to the
diversity among emerging market nations.
Hanna noted that the clear winners are Malaysia,
the only net exporter, and Indonesia because of
natural gas, while the losers are largely in north
Asia. The focus of the growth story last year was
on north Asia’s ability to benefit from China
growth, but when commodity prices are rising,
ASEAN’s relative performance looks a lot better.
The last complication is what had just
happened in Japan, explained Hanna. “It is a
case of understanding the interplay between
the event at the moment, understanding its
magnitude and separating that out from what’s
going to happen over time. That is crucial to
making sensible investment decisions.”
The Bank of Japan has already responded
with quantitative easing. As an economist,
Hanna said he thought it should just do a lot
more of this. “It’s also a question of what Japan
means for everybody else. As far as GDP is
concerned, countries where the effect actually
matters are all clustered here in Asia and for a
1% impact in Japan, there’s maybe 0.1%
impact on other countries’ growth.”
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Meeting Tomorrow Today
ASIAHEDGE FORUM
Capital-raising environment for Asian funds
and changing investor attitudes
“
I don’t understand the western thinking about being no
more than 10% of a fund’s AUM. If I’m only 1% [of the fund],
the manager may not even make time to see me
”
L to r: Patrick de Gentile-Williams, Nikos Latsos, Philippe
Paquet, Ed Rogers, Franz Schmid, Gilbert Grosjean
Panellists
Patric de Gentile-Williams, FRM Capital
Advisors
Nikos Latsos, Alpheus Advisors
Philippe Paquet, NewAlpha
Ed Rogers, Rogers Investment Advisors
Franz Schmid, Man Investments
Moderator
Gilbert Grosjean, Citco Group
What would it take for global investors to
commit to Asia as a mainstream option and
what are investors looking for in Asian managers? These were two of the key questions
posed to the international panel of hedge
fund allocators. There were divergent views
on whether size of assets under management
was a priority consideration.
“We are hedge fund seeders, so the ones that
come to us are smaller managers,” said
Philippe Paquet of NewAlpha. “We use the
same criteria as in the US and Europe, though
we have a relative bias favouring locally based
managers investing in their native market
where they have long experience.”
In practical terms, the much-vaunted institutionalisation of the Asian hedge funds industry means that managers can define and
clearly articulate what they do, said FRM Capital Advisors’ Patric de Gentile-Williams. “We
need to understand how managers manage
money, otherwise they won’t get traction.”
Partnership with managers is a key element, said Ed Rogers of Rogers Investors Advisors. More than three-quarters of Asian
managers fail to meet staffing and AUM criteria, and those that succeed often have prob-
lems with their business management. “We
can add value in identifying problems with
the business side and fixing them,” he added.
Memories of Asian managers’ inability to protect on the downside in 2008 still linger in institutional investors’ minds, said Franz Schmid
of Man Investments. “What we need is more
managers that are either non-directional or directional, but with a broad mandate – this
will be quite attractive for many investors.”
Nikos Latsos of Alpheus Advisors argued
against the conventional wisdom about ensuring that any investment in a hedge fund
should be only a minor part of the fund’s
AUM, which limits the range of options in
Asia. “I don’t understand the western thinking about being no more than 10% of a fund’s
AUM. If I’m only 1% [of the fund], the manager may not even make time to see me.”
Going global: Building a world-class Asian hedge fund brand
Panellists
Kam Bahra, PMA Investment Advisors
Jimmy Chan, Value Partners Group
Bill Lu, Ortus Capital Management
Chris Nash, Senrigan Capital Group
Moderator
Aradhna Dayal, AsiaHedge
From veterans of the Asian hedge fund industry to new arrivals on the scene, the panellists
represented the elite of the Asian hedge funds
industry. All four are Hong Kong-based, and
find the city a perfect location to run a business with global reach.
Said Bill Lu of Ortus Capital Management:
“In our case, in terms of information flow we
don’t get any less, and in a world where information flow from China and Asia is becoming
increasingly important I think it’s an advantage to be here.”
For Value Partners, Hong Kong is not just
home to the firm but the home of many of its
investors, as it has retail distribution, said Jimmy Chan. “It has been very difficult to raise
money from European and US investors in recent years, and the wealth of this region is
much stronger than before.”
“
L to r: Kam Bahra, Jimmy Chan, Dr Bill Lu, Chris Nash and moderator Aradhna Dyal
Managers focused on Asian strategies find it
makes sense to be in Hong Kong, but whether
they are considered a global brand is not always up to them, said PMA’s Kam Bahra. “You
need to be good at what you do, disciplined
and cognisant of your capacity. What is classified as a global brand is actually up to the investors. If you have a suitable infrastructure
and longevity, you become investors’ first call
You’ve got to have a vision of what you want to build,
a plan to do it and a whole lot of capital at the start
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08-17 Forum.indd 11
”
for intelligence, and that all goes towards
building a global brand.”
Although the newest player on the panel,
Senrigan’s event-driven strategy was hugely
popular with investors from the start. The advice of Chris Nash of Senrigan for would-be
Asian-based managers who want to build a
global brand is: start by thinking big.
“You’ve got to have a vision of what you
want to build, a plan to do it and a whole lot
of capital at the start. It’s very hard to retrofit these things, and if you make cheap decisions you will live with them for a long
time,” he said.
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ASIAHEDGE FORUM
Meeting Tomorrow Today
KEYNOTE SPEECH: John Tsang, the Financial Secretary of Hong Kong
In his keynote address, John Tsang, the Financial Secretary
of Hong Kong, explained why Hong Kong makes such an
attractive base for hedge fund managers
Introduction by V-Nee Yeh, Argyle Street Management and member of
the Executive Council of the Government of HKSAR
V-Nee Yeh set the scene for John Tsang’s speech by saying that Hong Kong
market has the attributes of the three Cs: consistency, credibility and
competitiveness. “It is consistent because despite going through six market
bursts since 1999, its regulatory structure has remained unswerving and
coherent. It is credible because it has been predictable and transparent, instead
of reacting whimsically to the vagaries of market behaviour. It is competitive, as validated by
your [Tsang’s] presence and your interest in this market. So it is with pleasure that I introduce
John Tsang, the Financial Secretary, so that he can share further insights with us.”
“
Since the turn of the century, the global
hedge fund industry has seen some
remarkable developments. Back in the year
2000, total industry assets stood at US$277
billion. In the following seven years, this figure
increased seven-fold to almost US$2 trillion.
Then came the global financial crisis when
things practically come to a halt. Following the
turbulence of the past 18 months, the industry
is now back on track.
The question today is this, what next?
Here in Asia, there were 95 hedge fund
launches last year, up from 78 in 2009. Of the 95
new launches last year, 57 were in Hong Kong
with $2.4 billion in assets, making a total of some
550 operating hedge funds based right here in
Hong Kong. This maintains Hong Kong’s lead as
the preferred destination for hedge funds in Asia.
Nevertheless, the outlook of the hedge fund
industry globally is rather mixed. On the one
hand, sovereign debt risks and changes in
economic policy make for uncomfortable reading.
Natural disasters, including those in New Zealand
and Japan, take a heavy toll on the economies,
creating uncertainties and volatilities. Impending
reforms and demands for greater transparency
will also impact on the industry.
On the flip side of the coin, positive trends of
fiscal balance, growth, savings, rising living
standards and favourable demographics have
all moved east to favour Asia. This clearly
brings fresh opportunities to our region, and
also to this city.
The increase in the high net-worth individual
population is substantial in the Asia-Pacific
region. According to the World Wealth Report
2010 published by Merrill Lynch and Capgemini,
the Asia-Pacific HNWI population rose 25%
overall to 3 million, catching up with Europe for
the first time.
This is in tandem with strong economic
growth in Asia, in particular, in mainland China
which again saw double-digit growth last year of
10.3%. China is now a major capital exporter
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with the largest foreign exchange reserves in the
world, some US$2.5 trillion as of June 2010. The
mainland market has been opening up gradually
through the Qualified Foreign Institutional
Investors Scheme. This presents huge
opportunities for the funds industry. A total QFII
quota of US$19.7 billion has been granted by the
State Administration of Foreign Exchange to
foreign institutional investors as of end 2010.
With a robust financial infrastructure and
a large pool of professionals familiar with
China know-how, Hong Kong continues to be
an attractive platform for international
players to invest in the mainland. Under the
Qualified Domestic Institutional Investor
Scheme, approved commercial banks,
securities firms, fund management
companies and insurance companies are
allowed to invest in Hong Kong stocks and
other specified securities. A total QDII quota
of over US$68 billion has been granted by
SAFE as of the end of last year.
What makes Hong Kong an ideal platform for
hedge funds and financial institutions to explore
the business potential in Asia? We have the rule
of law, supported by an independent judiciary;
we maintain a low and simple tax regime; the
Hong Kong dollar is fully convertible and we
have no foreign exchange control. Perhaps most
important, besides location, we have a robust
and effective regulatory regime as well as a deep
and broad pool of financial talent.
All this makes Hong Kong an ideal place to
harness the opportunities presented by the
economic growth in Asia, and particularly in
Mainland China.
Allow me to outline five ways the Government
is strengthening the competitiveness of Hong
Kong’s asset management industry.
We are enhancing investor protection and
market quality. This includes improving the
legal framework of public offerings for
structured products. We are preparing to
establish an investor education council; and we
are gearing up to launch an independent
Insurance Authority, among other things.
We are promoting a business-friendly
environment. Here we are helping to develop
renminbi business in Hong Kong. We are
rewriting the Companies Ordinance and
modernising the trust law. This will help to
promote healthy competition.
A third area is to establish a network of
agreements for the avoidance of double
taxation or with major economies. In the 10
months since the Inland Revenue (Amendment)
Ordinance 2010, came into effect, we have
reached agreement on double taxation with 13
major trade partners. Others are in the pipeline.
Then there are fiscal incentives. Offshore
funds are exempted from tax for profits derived
from specified transactions in Hong Kong. The
abolition of estate duty since 2006 encourages
local and overseas investors to hold assets in
Hong Kong. Last year, I extended the stamp
duty concession for trading exchange-traded
funds to cover ETFs.
Our fifth initiative is to step up overseas
promotions. The Government has continued to
lead financial services delegations to the
mainland and other markets to promote Hong
Kong’s financial services. This is a great way to
highlight the city’s advantages as a major asset
management centre in Asia.
The first leg of a global campaign to
promote Hong Kong as China’s global financial
centre was held in London in November last
year. This was followed by the Asian Financial
Forum in Hong Kong in January and we also
held a conference in New York earlier this
month. Our ‘overseas fixtures’ will continue to
be played out in the months ahead.
Hong Kong will continue to be a reliable and
dynamic platform for both local and overseas
fund managers. With the global financial crisis
behind us in Asia, I am sure that the
hedge fund industry will continue to grow
and prosper in this part of the world.
”
© AsiaHedge
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Meeting Tomorrow Today
ASIAHEDGE FORUM
International hedge funds moving into Asia
Panellists
Young Chin, Pyramis Global Investors
Steve Kim, Marathon
Tim Rainsford, Man Investments
Scott Reinhart, Pine River Capital
Moderator
Martin Visairas, Citi Prime Finance
There has long been a steady stream of international managers beating a path to Asia. Panellists were asked about what they find when
they get here and what impact their presence
has on the local industry.
“If you say you’re Asian specialists, it’s hard
to be taken seriously if you’re not in the region,” said Pine River’s Scott Reinhart. “From
our standpoint, it’s been a huge boost to our
ability to be able to speak with brokers, analysts and management in the region.”
For Man Investments, the initial decision to
be in Asia was marketing-led, but in time the
Asian presence evolved from servicing structured products and managed futures fund clients to being a base for managers as well. “It
was easy for them to set up because we already
had a large infrastructure in Asia and as our
strategies will develop we’ll continue to do the
same,” said Man’s Tim Rainsford.
Pyramis’ Young Chin found that having people on the ground really boosted the firm’s
understanding of Asia. “When you fly in you
have a tendency to look at stocks in a certain
way, and you can’t understand the dynamics
and granularity as well.”
For Marathon, the decision to set up shop in
Asia was from an investment-decision standpoint – to get close to the markets – but being able to raise capital in the region came as
L to r: Young Chin, Steve Kim, Tim Rainsford,
Scott Reinhart, moderator Martin Visairas
a pleasant surprise. “Asia has become a much
more meaningful source of capital; there are
deep sources such as sovereign wealth funds
and family offices that have become acclimatised to investing in the hedge funds space,”
said Marathon’s Steve Kim. Still the firm’s
main focus is the US, and Asia will only be a
satellite, he added.
Hidden gems in Asia
Panellists
Greg Davidson, DCP Oracle
Robert Lewis, Novatera Capital
Lester Poon, Cheetah Investment Management
Peter Tasker, Arcus Investment
Moderator
Aradhna Dayal, AsiaHedge
For all the talk of the institutionalisation of the
hedge fund industry, it is still one in which
niche players can thrive. All four panellists
have found their own niche and came together
to discuss the environment for their strategies.
One of the issues was scalability. Cheetah Investment Management’s Lester Poon said investors often mistakenly thought that the limitations of the domestic China market might
restrict his fund. “But in the last few years mon-
ey allocated to the domestic
commodities
sector has gone up four
or five times,” he said,
while both Japan specialist Arcus Investment’s Peter Tasker and L to r: Lester Poon, Robert Lewis, Greg Davidson, Peter Tasker,
Greg Davidson of com- moderator Aradhna Dayal
modity arbitrage fund
DCP Oracle both agreed that the sweet spot was
Despite being a niche manager, Tasker has attracted a heterogenous investor profile, includbetween $300 million and $500 million.
However, for small-cap investor Novatera Cap- ing Japanese, other Asian and European individital, the strategy is not scalable, said founder ual investors, family offices, and fund of funds.
Robert Lewis. “I can do up to 300 company visits
Having a certain comfort level with risk dea year and put 30 companies in the portfolio. I termines the investor profile, said Davidson.
could go for bigger companies but one of the “People in Asia are more comfortable with the
nice things about small- and mid-caps is that risk of China. For most North Americans Chinot that many people are looking at them.”
na is an enigma,” he commented.
The emergence of Asian investors
L to r: Denise Hu, David Walter, Jerry Wang, John Knox,
Harold Yoon, moderator Aradhna Dayal
Panellists
Denise Hu, Archer Asia
John Knox, LGT Capital Partners
David Walter, PAAMCO
Jerry Wang, Vision Investment Management
Harold Yoon, SAIL Advisors
Moderator
Aradhna Dayal
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08-17 Forum.indd 13
Hedge fund allocators kicked off the panel
with a look back at the events of 2008 and how
industry participants have reinvented themselves since. “The biggest change has been a
real shake-out in managers – those with best
pedigree and track record have been able to
maintain business,” said Harold Yoon of SAIL
Advisors. “Managers with the best pedigrees
are the ones able to raise capital and [now] if
you’re going to get access to these well-known
managers, you have to get in early.”
Risk management and liquidity are much
higher on the agenda than they were before,
said LGT Capital Partners’ John Knox. “Our expectations of transparency have changed dramatically. We expect to know what people are
doing; we don’t like to rely just on trust.”
Not all allocators are looking for size –
PAAMCO’s David Walter is focused on emerg-
ing managers to invest in from the start, but
only those who are their own bosses. “We have
a huge aversion to seeding – those managers
are presented with enormous conflicts of interest, especially during times of stress,” he said.
Similarly, Archer Asia’s Denise Hu is realistic
about what the region can offer in terms of the
size. “Only a few funds can be compared with
big hedge funds outside the region,” she said.
On the topic of consolidation, it was not necessarily an answer to the industry’s problems, panellists said. Knox noted the Darwinian nature of
the industry that will make it extremely difficult
for those trailing along the bottom to survive,
but consolidation will not help them, said Vision
Investment Management’s Jerry Wang. “It’s not
that easy for two hedge funds to merge or to be
part of a bigger global fund. I don’t see a lot of
consolidation on the horizon,” he said.
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ASIAHEDGE FORUM
Meeting Tomorrow Today
Strategy Focus – Equities
L to r: Jason Schwartz, Jeff Levy, Amit Rajpal,
Jon Thorn, moderator Rodney Diola
Panellists
Jeff Levy, Turiya Capital
Amit Rajpal, Marshall Wace
Jason Schwartz, Symphony Financial Partners
Jon Thorn, India Capital Management
Moderator
Rodney Diola, AsiaHedge
The first of the strategy focus panels turned
the spotlight on equities, with a stellar line-up
of some of the region’s foremost equity managers.
Strategy Focus –
Non-Equities
Panellists
Prasoon Dayal, Nomura International
Brian Heywood, Taiyo Pacific Partners
Ivan Lee, Serica Partners
Eddie Tam, Central Asset Investments
Moderator
Neil Wilson, HedgeFund Intelligence
Given the diversity of the panellists, not surprisingly the discussion in the non-equities
session was wide-ranging, from the impact of
the Japan situation on credit markets, to China’s renminbi policy and what investors are
looking for in non-equities funds.
As the panellist with the strongest focus on
Japan was very much on their mind, with Tokyo-based Symphony Financial Partners having rolled out its emergency plan a few days
earlier by moving key staff to separate locations within and beyond Japan. However, the
reasons for investing in Japan are as good as
ever, said Symphony’s Jason Schwartz.
“The business aspect of the tragedy is that,
given the great degree of dislocation we’ve
seen, there are many opportunities. If you are
looking at the right types of companies and
getting in at the right levels, Japan is the best
place to be invested right now. There will be an
overhang on the market until the long-term
impact on Japan can be determined, but many
companies with great franchises are virtually
untouched by what’s going on in Japan.”
Both Amit Rajpal of Marshall Wace and Jeff
Japan, Taiyo Partners’ Brian Heywood remained sanguine. “There seems to be a consensus among those who have deep dealings
with Japan, that the long-term economic impact on Japan is not going to be as great as
CNN would have you believe,” he said.
As a manager of a pan-Asian credit-focused
fund, Serica Partners’ Ivan Lee saw the impact
on credit as being limited, at least as far as bigger companies were concerned. “The impact on
the rest of Asia is nothing dramatic,” he added.
Interest in non-equity strategies is growing,
said Nomura International’s Prasoon Dayal. In
recent years investors were so focused on liquidity their attention could not be pulled elsewhere. “Things have improved. I’ve seen a lot of
people looking seriously at convertibles, more
structured equity and structured debt instruments where they weren’t interested before.”
Looking at China, China’s grand experiment
with offshore renminbi in Hong Kong and the
Levy of Turiya Capital had been looking at
Japanese financials, both before and after the
disaster. “The fundamentals have generally
been very favourable,” said Levy.
“We focus on banks and other financials,
and the biggest opportunity is with banks,”
added Rajpal. “In Japan, the chance that the
integrity of the banking system will be compromised is very low.”
On the other side of Asia, India Capital Management’s John Thorn has been grappling with
a very challenging market but one that has
started to stir investor interest again. “India
was the worst-performing market in Asia before the Japan tragedy, and it’s still a very difficult market. However, I’ve just returned from
a marketing trip to the US, and for the first
time in five years had a very positive response.”
L to r: Eddie Tam, Brian Heywood, Ivan Lee,
Prasoon Dayal, moderator Neil Wilson
development of an offshore bond market
were trends worth watching closely, said multi-strategy fund manager Eddie Tam of CAI.
“The question of whether the RMB can challenge the US dollar and the euro is way off
into the future; the amount of RMB in the system would need to increase by two orders of
magnitude first. But people have been coming
up with RMB bond issues to satisfy demand
for RMB assets.”
China: What is the true potential of this awakening dragon?
Panellists
Donna Kwok, HSBC
Chad Liu, Prudence Investment Management
George Phillips, Northwest Investment Management
Jenny Tian, Springs Capital
Richard Williams, Caliburn Capital Partners
Moderator
Aradhna Dayal
China’s credit market was a hot topic at the
China panel, with China credit specialist Chad
Liu of Prudence Investment Management outlining the market’s prodigious growth in recent years. “The credit market is deepening in
terms of diversity, issue size, and the number
of issuers. Looking at the pipeline, talking to
state-owned enterprises and the sell-side, everybody is eyeing this market,” he said.
HSBC’s Donna Kwok brought an economist’s
14 April 2011
08-17 Forum.indd 14
L to r: Richard Williams, Jenny Tian, George Phillips,
Chad Liu, Donna Kwok
perspective to the panel, and described the growth
of RMB business in Hong Kong, which she expects
to hit critical mass as a trading currency by 2015.
Northwest Investment Management’s George
Phillips noted that a few days earlier at the National People’s Congress, Premier Wen Jiabao
gave emphasis to having less reliance on banks
for financing and to the development of the
capital markets. “This is absolutely crucial, it’s
everything to us. It’s interesting to work out
ways to overcome barriers to entry such as the
inability to short individual shares. There is
substantial potential for arbitrage-related profits that can emanate out of China.”
Being an onshore manager, Springs Capital’s Jenny Tian had a unique perspective on the China
market to share. “We focus on three themes – ‘rising from the ashes companies’ that were pummeled in the economic crisis, especially in chemicals and machinery; new economy industries such
as alternative energy space, second- and third-tier
retail and health companies; and China financials.”
As an allocator to China funds, Caliburn Capital Partners’ Richard Williams noted the growth
of interest in China and increasing diversification of styles. “More people are allocating resources to China research. The really interesting
development in long/short equity has been the
addition of mainland talent, and also the development of big mainland institutions.”
© AsiaHedge
19/04/2011 12:41
Meeting Tomorrow Today
ASIAHEDGE FORUM
KEYNOTE SPEECH: John Ho, Janchor Partners
As chief investment officer of Janchor Partners, a Hong
Kong-based, long-term fundamental Asia-Pacific hedge fund
manager, John Ho is in a prime position to have observed the
region’s fickle investment cycles as well as the growth of
world-class hedge funds within Asia. In a delightfully witty and
thought-provoking presentation, he focused on two key areas
that are vital for the success of hedge funds in Asia today: the
benefits of long-term investing as well as the alignment of
interests between managers and investors
Giving the audience an insight into what he
playfully called ‘the Asian investor ovarian
lottery’, Ho started out by showing how typical
investors react to stock price movements over
various market cycles. “If you’re a fund
manager, how do you deal with the dreaded
cycle? In the very beginning, you see the market
rising, and you say: ‘I’ll just watch for a while.’
Then it keeps going up, so you jump in. It keeps
going up, you’re feeling good, you’re making
your performance fees. But then it goes down a
bit. You conviction is slightly shaken, but you
say: ‘Okay, this is a time to buy’, and you fill up
your portfolio some more. Then it goes down a
bit more. You start to shake a bit but double
your positions because they are at about the
same level as when you started buying.
“Then it goes down further and gets to half
of its peak, and you think it has to be the
bottom, but then it falls some more. You
wonder why the central banks are doing
nothing. Then it falls even more and then you
panic and say: ‘Enough is enough, I’m never
buying stocks again.’ Then it goes down more
and you say: ‘Thank God I sold everything.’
When it starts going back up, you ignore it,
thinking it will probably tank again. Then it
keeps going up, and you say to yourself, ‘I knew
this would happen,’ but by now you’ve sold
everything. And so you finally say: ‘What the
heck, I’m buying again.’”
This is typical investor psychology, and in Asia
this happens very frequently, explained Ho.
Clearly there are opportunities in this panic but it
is hard to break out of this investor psychology
and buy when things are going down.
Moving on to bridging the gap between
manager and investor interests, Ho noted that
managers face an interesting challenge in
winning the confidence of allocators. “The
party line is we will make about 15% annual
returns over the cycle, but the question is how.
First off, there is the boys-to-men effect:
© AsiaHedge
08-17 Forum.indd 15
allocators don’t want you to be too young, but
they also don’t want you to be too big. Then
there was Hedgegate – the scandals of 2008.
Suddenly allocators didn’t have the liquidity
they thought they bought.”
So the real question is: what do allocators
want and what do managers want?
“From a manager’s perspective, we want
stable capital and sufficient scale. We also want
anti-cyclical allocators – it’s fine to have
redemptions when the fund is doing well. Finally
and most importantly, we want allocators to
give us timely counsel and advice. Allocators are
one step back and can give us something very
valuable to help us focus on the task at hand.”
“
Allocators are one step back
and can give us something
very valuable to help us
focus on the task at hand
”
From an allocator’s perspective, they want
transparency and liquidity, they want to know
that when they are told they can have their
money, they can have it, Ho noted. Scaled
management fees have been talked about for
many years – as assets rise, the costs of
managers do not go up in a linear way, but their
fees do. Allocators want the management fee
to be fair, added Ho. They also want
performance to be measured over a cycle.
Finally they want timely and proper disclosure.
“If things are good, tell them. If things are bad,
you definitely have to tell them.”
Janchor, for example, does not call its
investors ‘clients’. “We call them investment
partners. If you put these two wish lists [for
managers and allocators] together, you can
find a way to make each of the four points work
together,” explained Ho.
He also emphasised that Janchor’s fee
structure enables investors to claw back fees
over multi-year periods. “We take out each
year’s performance fees over three years, in
one-third installments (subject to claw-back if
the fund is below high water mark). Vesting of
fees means that the investors are less likely to
redeem.” The firm has three share classes with a
three, two and one-year commitment period.
Three years is a hard lock-up, though investors
have a fee-free liquidity option of 12% in each
of the second and third years. Some investors
do one, two, and three year lock-ups, which
gives them 25% liquidity a year. “We think this
is a good model for the industry. Allocators
don’t get freaked out, managers don’t get fat
and lazy,” remarked Ho.
Finally Ho talked about investors having
hit the Asian investor “ovarian lottery”.
Firstly, because bouts of euphoria and panic
create material inefficiencies in Asia, and
that means there’s a lot of money to be
made. Secondly, Asian markets are dynamic,
opaque and not well-researched. Thirdly,
structural growth is a given, coupled with
growth traps and value traps.
There are issues such as weak corporate
governance, but that is improving from a low
base. Even Japan is improving in corporate
governance and this creates a lot of
opportunities, Ho added. Also, shorts can be
standalone alpha generators, not just a
market hedge and there are a lot of
opportunities there. And finally there are huge
mega-trends, where you do not even need to
do research to see them.
Janchor’s long-term approach is to make use
of having won the ovarian lottery, overcome
conflicts with “what allocators want”, and get
through the various cycles, noted Ho. “Our
universe is Asia including Japan, which has a
market capitalisation on a par with the US.
But it’s a way more interesting, inherently
heterogeneous market that allows us to have
diversification of ideas.”
April 2011 15
19/04/2011 12:41
ASIAHEDGE FORUM
Meeting Tomorrow Today
L to r: Richard Cardiff, Rupert Foster, Gareth James, Andrew Main, moderator Neil Wilson
UCITS: A structure of
choice or necessity for
Asian hedge funds?
Panellists
Richard Cardiff, Coupland Cardiff
Rupert Foster, Matrix Group
Gareth James, LFG
Andrew Main, Stratton Street Capital
Moderator
Neil Wilson
Panellists from diverse backgrounds, all had
in common the fact that they have embraced
UCITS structures. Gareth James of LFG put it
in a nutshell when he said that UCITS is a
wrapper that radically expands the potential
investor base for hedge funds. “The UCITS
platform helps to get to tier-two and tier-three
investors where you are getting smaller ticket
sizes,” he said.
Just how big UCITS is going to be for the
hedge funds industry is still open to question
despite efforts by regulators and governments
to drive hedge funds onshore, said Coupland
Cardiff’s Richard Cardiff. “For a while it was
130/30 funds, then it was managed accounts
that were going to save the world, and now
UCITS. Whether it will solve the problems investors think it will remains to be seen, but
UCITS funds will certainly be around.”
Many investors are likely to find a UCITS
product appealing, said Rupert Foster of Matrix Group. “If you can genuinely offer a hedge
fund unit trust that’s very attractive to an audience that’s only had long-only.”
It was agreed that not all strategies fit UCITS
though. Taking a strategy that does not have
sufficient liquidity, or one that requires lockups and trying to pack it in a UCITS wrapper
would be like trying to put a square peg into a
round hole, said Stratton Street’s Andrew
Main. “Fixed income is difficult to fit into a
UCITS wrapper, so we’re doing that as a longonly product,” he explained.
Regulation: Changing regional
and international regulatory
winds are shaping Asian
hedge funds
Panellists
Stephen Po, Hong Kong Securities and Futures
Commission
Joe Seet, Sigma Partnership
Mark Shipman, Clifford Chance
Woon Hum Tan, Shook Lin & Bok
Daniel Viola, Sadis and Goldberg
Moderator
Maria Cantillon, State Street
Major regulatory changes looming in both the
US and the European Union were the topic of
the concluding panel of the AsiaHedge Forum.
New York-based lawyer Daniel Viola of Sadis
and Goldberg told the Forum that many nonUS-based managers were concerned about the
Dodd-Frank legislation. “The Securities and
Exchange Commission gave a comment period
on the Dodd-Frank rules. We said they
shouldn’t impose SEC regulation on firms already registered and regulated in a foreign jurisdiction, but I don’t they will change their
mind,” he said.
16 April 2011
08-17 Forum.indd 16
The Hong Kong Securities and Futures
Commission’s
L to r: Stephen Po, Joe Seet, Mark Shipman, Woon Hum Tan, Daniel Viola,
Stephen Po said that
moderator Maria Cantillon
Hong
Kong-based
hedge fund managers
who are interested in tapping US should re- managers can continue to market their funds
member that SEC registration gives SEC exam- actively,” he said.
iners the right to visit managers in their overUltimately, some managers will have to inseas offices and demand to see their books. vest in the expert manpower they will need to
“They are very thorough and intensive. The navigate their way through both Dodd-Frank
SEC doesn’t license firms, it’s a registration and the EU AIFM Directive if they have subprocess, but when you file any ADV form with stantial business in either jurisdiction, said
Woon Hum Tan of Shook Lin & Bok. “Some
the SEC don’t take it lightly.”
Turning to the European Union’s Directive managers will bite the bullet and jump
on Alternative Investment Fund Managers, Joe through the hoops and get it done. Others will
Seet of Sigma Partnership commented that it say it’s not worth it, which is a shame because
was thanks in part to the efforts of the Alterna- a lot of people are interested in Asia,” he said.
tive Investment Management Association that
Indeed, intensified regulation will likely pothe directive been shaped the way it has. larise the industry “into those that embrace it
“There is a reprieve for offshore funds to fall and grow and those that don’t, and they will
under the requirements of the AFIM regime struggle to grow,” concurred Mark Shipman of
until 2018 and between now and then, all Clifford Chance.
© AsiaHedge
19/04/2011 12:42
Meeting Tomorrow Today
ASIAHEDGE FORUM
Picture gallery from the
AsiaHedge Forum 2011
© AsiaHedge
08-17 Forum.indd 17
April 2011 17
19/04/2011 12:42