| HONG KONG
HONG KONG Jan 21 For those investing into
Asia's hedge funds last year, smaller was better.
The region's largest hedge funds - those managing more than
$500 million - delivered weaker returns on average than nimbler,
small to medium-sized funds, according to fund research and
people with knowledge of the individual funds.
In a year when several Asian stock markets rallied, many
bigger hedge funds failed to beat benchmark returns.
Blue chip funds such as Ortus Capital Management and
Senrigan Capital lost money, while high-profile launches Azentus
Capital and Dymon Asia ended the year barely in the black, said
people familiar with their returns. Smaller hedge funds such as
Factorial and the Splendid Asia macro hedge fund, however, made
their investors richer.
"The industry's dirty little secret is that institutions'
need for scale leads them to invest in organisations and funds
that are actually too big to be safe," said Peter Douglas,
founder of Singapore-based hedge fund consultancy GFIA.
The numbers for last year will feed a cynical view that
hedge fund managers who raise a lot of money get rich from the
management fee, regardless of performance. Most hedge and
private equity funds keep a fifth of their profits and charge a
2 percent fee on the money they raise - so the more capital
coming in from investors, the bigger the fee.
But managers of the smaller funds in Asia realise that if
the bigger funds stumble, the entire industry will be affected.
While some money meant for large funds will be diverted to
smaller, better-return funds in the region, others will opt
instead to send their money to the United States and Europe.
Asia hedge funds returned an average 9.8 percent in 2012 as
measured by the Eurekahedge Asian index - little more than half
the 18.6 percent gain on the MSCI's broadest index of
Asia-Pacific shares outside Japan. JP Morgan's
EMBI Global index, which constitutes dollar bonds issued by
emerging market sovereigns, gained 15 percent.
Most home-grown Asia hedge funds managing more than $500
million each fared worse than that, underscoring GFIA research's
premise that good performance becomes less likely when a fund
exceeds $500 million.
Ortus Capital, which manages $2.5 billion, saw its hedge
fund lose 17.3 percent in 2012, its worst annual return since
launching a decade ago. It fell more than 6 percent in December
when the yen weakened as the Bank of Japan increased its
asset purchase program. "The dramatic move produced our biggest
loss contributing nearly 80 percent of the losses for the
month," Ortus, one of Asia's biggest hedge funds, wrote to
Senrigan Capital, an Asia-focused fund backed by Blackstone
Group, lost 11.5 percent last year, while Azentus
Capital, a hedge fund set up by former Goldman Sachs
trader Morgan Sze and which once managed $2 billion, gained just
about 1 percent, an improvement on the 6.8 percent loss it had
The $2.5 billion Dymon Asia Macro Fund, run by former
Citadel fund manager Danny Yong, also gained about 1 percent,
said people with direct knowledge of the fund's return, down
from a 20 percent gain in 2011.
For comparison, an investment just in 1-year US treasuries
would have earned 1.3 percent last year.
RISK VS RETURN
The returns from top funds are feeding a perception among
investors that Asian hedge funds don't provide the results to
match the risk that investors associate with the region.
As the numbers come under scrutiny, Asian names producing
single digit returns may face the axe as investors can achieve
similar or better returns in developed capital markets where
there is relatively less risk and far more consistent liquidity.
The bigger hedge funds in Asia find it tougher in less
liquid markets to make big enough bets to have a significant
impact on the portfolio. The search for returns can often lead
to trades outside a fund's core competency or deals pushed by
investment banks - increasing the risk of losses.
But for prime brokers and service providers, the funds earn
tens of millions of dollars in fees. Those in charge of
allocating money at large pensions and endowments tend to send
money to larger funds because their size implies reliability.
"Most of the alpha is found in mid-cap managers, which in
Asia is $50 million to $250 million and where we invest most of
our capital," said Gottex Fund Management co-founder
Max Gottschalk, whose Asian fund of hedge funds returned 18.4
percent in 2012.
Former Credit Suisse trader Charlie Chan's $105
million Splendid Asia macro hedge fund lived up to its name,
gaining 63 percent last year betting on real estate investment
trusts, bonds and currencies. And Factorial Master Fund,
launched by ex-DKR Oasis bookrunner Barun Agarwal in January
last year, advanced 23 percent, according to a person with
direct knowledge of the fund. The fund, which made money each
month, manages less than $50 million.
Fortress Asia Macro Fund, which increased its assets to $500
million by the year-end, gained 21 percent, said a spokesman for
the global money manager.
There are signs that some investors are starting to switch.
Titan Advisors, which manages about $3 billion for pension
funds and wealthy individuals, has shifted some money it invests
with around two dozen hedge funds from larger funds to smaller
"If we had another 10 Asia long shorts with between 300 and
600 bucks each and no larger, then that would be more beneficial
to the Asian hedge fund industry than 10 underperforming billion
dollar funds," said a prime broker who asked not to be named as
he didn't want to jeopardise client relations.