Staying sanguine

The market correction in early February should not dampen the broader outlook for Asia-focused hedge funds

A little over a week had passed after my first editorial was published – in which I said I was ‘cautiously optimistic’ for the Asia hedge fund industry – before markets across the globe started week-long nosedives.

National newspapers from all over referred to ‘panic selling’ or ‘markets collapsing’, while one even went as far as to mention a ‘crash’. Media hyperbole aside, my role as Asia hedge fund industry soothsayer had got off to a rather inauspicious start.

Yet, after a week or two, stocks rallied and this market correction should not dampen the broader outlook for Asia-focused hedge funds. In fact, this correction may even prevent the reckless overconfidence that can occur in low volatility markets and benefit managers looking to provide investors with downside protection.

William Ma, the CIO of Noah Holdings and portfolio manager of the Gopher China fund of hedge funds, has seen no need to panic due to the strong economic fundamentals in the region and strong earnings growth forecast for many companies.

Even outside Asia the outlook seems bright. A report released from BlackRock analysts noted a positive fundamental backdrop of above-trend global growth and healthy corporate earnings. It also said the risk of the Federal Reserve raising interest rates too quickly and triggering a US recession over the next two years appears very low.

This is vitally important if we believe the old adage: “When the US market sneezes, Asia and emerging markets get pneumonia,” as Bank of America-Merrill Lynch strategists wrote of February’s early losses.

There is also a positive impact of the much weaker-than-expected dollar, which has increased the strength of the RMB. This strengthening of the Chinese currency is reducing capital outflows from the nation and helping Chinese managers stem redemptions from US and European investors.

Reducing outflows takes on an even greater importance for the Asia hedge fund industry with new fund launches stagnating.

AsiaHedge’s data team this month crunched the numbers to reveal the number of H2 2017 fund launches and how much capital these emerging managers were able to garner. The story is all too familiar within the hedge fund industry, with the relatively low number of new funds being established echoing the broader global trend towards fewer but larger funds. In total 27 funds raised $1.48bn in the second half of last year.

Groups that are spinning out of internationally-recognised managers are finding it easier to gain traction with institutional investors. Ovata – the multi-strategy global equity strategy led by James Chen, a former senior portfolio manager at BlueCrest – raised $200m. More than $100m went to Hong Kong’s Ishana Capital’s Master Fund. Run by Former Janchor Partners portfolio manager Hari Ravisankar the fund received seeding from HS Group.

But local managers looking to corral capital are finding it difficult as many of these start-ups rely on day one capital from the region’s family offices and high-net-worth individuals (HNWIs). Understanding the manner in which these investors allocate capital is key to building support for your fund.

Speaking to AsiaHedge, Hong Kong-based family offices say they don’t have objective guidelines when it comes to handing over cash to a fund manager. Performance alone will not cut it, but rather they are on the lookout for integrity and trustworthiness. Leading a lavish lifestyle was also a red flag for a few investors.

Managers accepting capital from family offices and HNWIs need to fully understand the motives behind the commitment too. While some are true value investors looking to support funds that offer good returns, others may want to play general partner and get what they consider to be a cheap outsourced analyst.

It seems fund managers are aware of this. According to HFM’s latest Insights report – Winning New Business – fund managers with sub-$300m in assets under management value family offices far more than HNWIs; almost 60% of these managers hope to attract family offices, whereas only 21% hope to attract HNWIs.

But it is difficult to say no to this money as the manager needs it to initially grow and survive, before beginning to diversify the client base.

So, positive underlying fundamentals should support performance, but challenges in getting traction for new products remain. Overall, I remain warily sanguine.