| HONG KONG, June 26
HONG KONG, June 26 Some of Asia's oldest hedge
funds are ditching short-selling as investors pull out of the
strategy on concerns that bearish bets are failing to pay off
and not worth the hefty fees they bring.
The move from the traditional hedge fund structure to long
only investing is part of the growing shake-out of Asia's $124
billion industry, and is a potential blow to the investment
banks supporting the sector.
Nearly 40 percent of hedge fund assets in Asia are still
parked with long/short managers who aim to make money in any
kind of market, by betting both for and against publicly traded
companies. Funds that combine long and short investing command
twice the fee of a long-only, non-benchmark fund.
But few Asian funds are seen as having the stomach or the
expertise to put on effective bearish bets. Short selling
involves selling borrowed shares, and buying them back later
when the price falls, with managers pocketing the difference.
The strategy can be profitable, but a failed short bet can
be very damaging, especially in a volatile market like Asia.
Adding to the challenges is that Asia has varying short-selling
rules and certain countries that bar the practice.
While the long-only bias has been a factor in Asia for
years, analysts tracking the sector say last year's losses
coupled with the current market volatility presents Asia's hedge
funds with a stark and immediate choice: shut down, cut fees or
convert to long-only.
Tantallon Capital, which managed $1.7 billion at its peak,
will give up shorting from next month. Others such as Indea
Capital, which once held $750 million in its hedge fund, and ARN
Investment Partners, are shutting down their long/short equity
funds and have decided to focus on long-only products.
The shift from long/short will also cut leverage and stock
lending opportunities for prime brokers such as Goldman Sachs
and Morgan Stanley that service hedge funds.
Long/short hedge funds are a major contributor to prime
brokerage industry revenues and banks' fee pools.
"Investors are increasingly seeking alternatives to hedge
funds, and are looking for intelligent ways to access Asian
growth," said Peter Douglas, founder of hedge fund consultancy
GFIA. "Long-only unconstrained strategies are a natural
beneficiary of these trends."
Long-only funds that can invest in a broad range of stocks,
such as Singapore-based Arisaig and the Asia Landmark Fund of
fund firm New Silk Road Investment, are hitting all-time peak
assets, even as Asia's hedge fund industry remains nearly $50
billion below its pre-crisis assets of $176 billion.
Assets in long/short funds have halved to about $47 billion
over the past four-and-a-half years. Of the 47 Asian hedge funds
that have shut this year, 33 are long/short funds, according to
industry tracker Eurekahedge.
Long/short funds typically charge a 2 percent management fee
and 20 percent performance fee, double the fees for the "1 and
10" long-only fundies. These long-only funds differ from mutual
funds as they don't follow any benchmark index, promise absolute
positive return and charge performance fees.
Investors have complained for years that most long/short
hedge funds in Asia are really long-biased funds -- pursuing the
same strategy as a long-only fund, but leveraging up their bets
to bolster returns. Eurekahedge estimates at least 70 percent of
such funds are really long-biased funds.
Traditionally, a lack of liquid stocks and tools, as well as
restrictions on short-selling in countries such as Korea and
Japan, have been impediments to short-selling in Asia.
More recently, the flood of money unleashed by central banks
to tackle the global financial crisis has hurt stock pickers,
boosting all stocks together and making short bets more
"The current market is largely dictated by macro," said
Lawrence Ka, a senior portfolio manager at Hong Kong-based fund
of hedge funds manager Penjing Asset.
While some mega hedge funds could create some short-term
trends with collective bets, this was unlikely in Asia.
"If you are a small long/short manager, it is very difficult
to fight this battle. That's one of the reasons why some
managers are sticking to long-only," he said.
In a letter to investors titled "time for a change",
Nicholas Harbinson, a former Merrill Lynch and Goldman Sachs
executive who founded Tantallon in 2003 with former Morgan
Stanley executive Alex Hill, told clients that short selling had
been a distraction and had cut gains from a long-only portfolio.
A long-only Tantallon Fund would have generated a 143
percent return since launch, he said. Instead, the long/short
fund produced a 55 percent gain since its inception in late 2003
through May 2012. Its assets have fallen to just $35 million
from $1.6 billion in 2007 as investors have put their money
elsewhere, data compiled by Reuters showed.
"Shorting is possible. Some people do it exceptionally
well," Singapore-based Hill told Reuters.
"Our experience though has been that we, while profiting
from shorting from time to time in extreme periods, have found
that over the longer run, our long only performance is better
than the combined long and short performance."
Raj Mishra, founder of Singapore-based Indea Capital, told
clients in a letter last month that "shorts have been a drag on
performance" of his long/short funds, while the long-only
strategy had produced an excess return of 92 percent over the
last 92 months. He will focus on long-only funds from July 1.
"The economics of maintaining a fund which is not of big
size is not favourable. Also, not a lot of assets are going to
long/short funds so then why waste our time there?" Christopher
Wong, fund manager at ARN Investment Partners, said.
Wong is shutting down his long/short hedge fund ARN Asian
Enterprise after its assets fell to just $26 million from the
more than $500 million it managed in 2007. He will now focus on
his long-only ARN Newly Industrialised Economies Fund.
Long-only players have grown assets under management.
Arisaig Asia Consumer Fund has increased its assets to $2.4
billion from about $1.6 billion two years ago. AR New Asia Fund
has tripled assets to $600 million-plus in the last three years.
Other big Asian players include Singapore-based Arohi Asset,
with $743 million at the end of December, and Hong Kong-based
Overlook Investments, with $1.9 billion, according to filings
with the U.S. Securities and Exchange Commission.
The shift has also benefited smaller players such as
Singapore's One North Capital, which has grown assets more than
nine-times to $90 million from its launch three years ago.
Albizia ASEAN Opportunities has grown assets to about $75
million from $9 million two years ago.
"There is an oversupply of long/short equity in Asia
compared with the demand so it's an incredibly difficult place
to raise assets, whereas there's a relatively small supply of
good quality, unconstrained long managers," Douglas of GFIA
"That's really the only bright spot to be honest," he said.