March 31, 2008 / 12:32 PM / 12 years ago

Asia hedge firms see distressed asset opportunity

HONG KONG, March 31 (Reuters) - Hedge funds betting on the debt of troubled companies look set to feast after years of lean pickings in Asia Pacific as the global credit crunch tosses up a banquet of opportunities, industry players said on Monday.

Macro hedge fund managers, who bet on trends in currencies, interest rates and other assets, are also seen doing well amid the current global market turmoil, which has battered many hedge funds investing exclusively in stock markets.

“Where are we adding (exposure) right now? I’d be adding actually distressed towards the end of this year. Australia looks very interesting in that respect, getting more interesting by the day,” Michael Garrow, vice-president with The Blackstone Group (BX.N), told the GaimAsia hedge fund conference in Hong Kong.

“We’re seeing that with our multi-strategy managers who are kind of doing some of the asset allocation for us. They’re on one of the biggest hiring sprees for credit and distressed (specialists) in as long as I’ve known them.”

The Hong Kong-based executive with Blackstone’s fund of hedge fund unit, which manages about $30 billion, said Japan was also a market that was likely to provide distressed investment opportunities, particularly in the property sector.

Several Australian companies have become casualties of the global credit crunch, which has closed off their usual avenues of borrowing. These include debt-laden shopping mall owner Centro Properties Group CNP.AX which is under pressure to sell assets to raise cash.

Asia-focused hedge funds have been among industry’s worst performers globally since the start of the year, according to research firm and consultancy Eurekahedge. After producing five straight years of double-digit percentage gains, the Eurekahedge Asian Hedge Fund Index is down about 4.23 percent this year.

This compares with declines of 0.78 percent and 1.94 percent respectively in its North American and European indexes.

Asian hedge funds were hit harder by tumbling stocks partly because equity-focused long/short funds are overrepresented compared to more developed markets. While these funds are supposed to profit in both rising and falling markets, analysts said in many cases they are long-biased.

MSCI’s measure of Asian stocks outside Japan .MIAPJ0000PUS has dropped over 13 percent so far this year, its worst quarterly performance in more than five years.

While Asian stocks are now much cheaper, hedge fund executives said the likelihood of a prolonged credit squeeze could create the most compelling prospects in fixed-income markets, with so-called vulture funds set to profit handsomely.

“It’s going to come out of these liquidity dislocations over the course of the year. I think the distressed space is definitely going to create tremendous opportunities,” said Eugene Kim, chief investment officer with Tribridge Investment Partners, a fixed-income hedge fund with more than $160 million in assets.

“We’ve seen over the last year, year and a half, approximately $80 billion of private placements that have been done in Asia. I would expect the default rate on those securities is probably going to be somewhere near 20-25 percent.”

Macro hedge funds are also seen doing well because of the aptitude of many macro managers to play long-term trends like the falling U.S. dollar, soaring commodities and even falling stocks.

Blackstone’s Garrow said macro hedge fund investments have made money for the firm this year.

Steve Drobny, chief investment officer of Drobny Global Asset Management, told the conference his firm had set up a macro-focused fund of hedge funds last year specifically because the strategy can do well in a downturn.

“We have not been believers in the perfect world we’ve seen from ‘03 to ‘07, so we figured it was time to put our money where our mouth was and put some allocations with guys who can make money from doom and gloom,” he said.

editing by Elizabeth Fullerton

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