Asian hedge funds step in as global players flee

By Tony Munroe - Analysis

HONG KONG (Reuters) - The investment banks and global hedge funds that are the usual buyers of debt and equity in struggling Asian companies have largely fled the market, leaving the distressed asset space to home-grown investors.

Local players with the cash -- and the stomach -- to remain in the hunt for cheap assets find themselves with the luxuries of time, choice and pricing power.

"We're just taking our time and doing our homework, because a lot of the traditional buyers are not in the market," said Chris Gradel, managing partner at Hong Kong-based Pacific Alliance Group, which runs $1.6 billion in hedge funds.

Investment banks have largely shut down their proprietary trading operations, known as "prop desks," that were avid buyers of often-illiquid assets that carry plenty of risk and offer the potential for big returns.

Global hedge funds that were active in buying exotic Asian assets, meanwhile, have been forced to hoard cash and scale back their presence as investors ask for their money back.

"Bank prop desks are out of the market," Gradel said in an interview. "A lot of the hedge funds basically don't have cash to invest because of redemptions, so compared to who you would normally expect to be in the market looking at these kinds of things, suddenly they're not there."

Local hedge funds aim to capitalize on the opportunity.

ADM Capital, a Hong Kong-based specialist in distressed debt, told Reuters last month it may look to raise $500 million to $1 billion in new funds in 2009 to invest as even high quality firms struggle amid the financial crisis.

Singapore-based Artradis Fund Management, which runs more than $4 billion in hedge funds, said in October it plans to raise $500 million for an Asian convertible bond fund that will look for cheap convertibles in the region, including Japan.

Peter Douglas, head of consultancy GFIA, figures that hedge fund assets have shrunk by 30 percent this year and said that all funds will continue to be hurt by redemptions and the unwillingness of investors to chase outperformance, or "alpha."

But in the longer term, he sees attractive prospects for home-grown players with track records of success in Asia. Many global names, by comparison, came to Asia late in the upcycle.

"Hedge funds make returns from taking advantage of inefficient markets. The low volumes, absence of funds and huge dislocations will translate to exceptional returns in the next 2-3 years," he said.

RISK REVULSION

Investors banking on a recovery in the global economy and corporate profits are sticking mainly with safer blue-chip options after a brutal sell-off in the region's stock markets.

"Until there's a recovery in the public markets, to the extent that there is no longer screaming value in very liquid public equities, very few people are going to take the time to go and salvage the illiquids," said Steven Barg, managing director and head of global capital markets for Asia at UBS.