April 30, 2010 / 10:15 AM / 8 years ago

UPDATE 1-HK hedge fund DragonBack sees assets cut by 85 pct

* DragonBack sees assets cut to $45 mln from $316 mln

* Flagship fund down 5.8 pct in 2009, down 3.5 pct yr to date

* Has cut investment team to six members from eight

By Parvathy Ullatil

HONG KONG, April 30 (Reuters) - Hong Kong-based hedge fund manager DragonBack Capital has seen a dramatic reversal in its fortunes over the last 12 months, with its assets plunging 85 percent to around $45 million amid continued redemptions from fund of hedge funds.

Last year at this time, assets in the fund were at $316 million, falling to $187 million by year end, DragonBack Asia Chief Executive Robert Lance told Reuters on Friday.

“The AUM gods giveth and they taketh away,” said Lance referring to assets under management. “You have to stay philosophical and practical about these things.”

“We’ve met all the redemption requests, never put up any gates, no side pockets and remained very transparent throughout this process,” he said.

Lance said the redemption cycle for DragonBack started later than it did for the rest of the industry. The hedge fund manager closed its flagship Asia-Pacific Equity Multistratgy Fund to new investments in August 2008 while assets peaked at close to $600 million by October.

The fund’s long volatility strategy flourished as global markets went into a tizzy during the financial crisis, helping it gain 3.75 percent in 2008, placing it in an exclusive club of hedge funds that made money in 2008.

Investors began pulling their money out in the first quarter of 2009, said Lance and redemptions have been quite consistent ever since.

“The challenges we face are not unique to DragonBack. It’s common to all Asia-based hedge funds that have a fairly large portion of investments coming from fund of funds,” said Lance.

Fund of hedge funds, particularly in Europe, took a big beating in 2009 after global hedge funds fell 19 percent in the previous year, forcing them to quit investments in Asia as they grappled with liquidity problems in their home markets.

LONG VOLATILITY

DragonBack’s multi-strategy fund lost 5.84 percent in 2009 as volatility came off and fell a further 3.52 percent as of last week.

DragonBack’s other fund, VolAsia, gained 4.92 percent in 2009 and is up 0.5 percent as of 23 April 2010. The multi-strategy fund has $36 million in assets under management, according to recent industry data, while the VolAsia fund manages $9 million.

“The assets decline has been detrimental to the portfolio build out, which is why in recent times our returns have been conservative,” said Lance.

2009 was a challenging year for long volatility funds that bet on price swings in financial assets, as global markets surged on hopes of an early economic recovery. Other Asian volatility fund managers such as Singapore-based Artradis Fund Management were also pummeled as volatility crashed. [ID:nHKG241745]

Hedge funds in Asia, excluding Japan, had a stellar year in 2009, returning close to 40 percent, far outstripping growth in their U.S.-based and European counterparts.

DragonBack had cut its investment team to six members from eight, to bring it in line with its reduced assets base, said Lance.

Lance also said efforts were underway to bolster the fund’s assets with capital from the firm’s partners, friends and family.

DragonBack was set up in 2007 by Lance, a former Hong Kong-based co-head of equities at Lehman Brothers, Matt Barnett and Philip Tye.

The hedge fund manager is also planning to open up its fund platform, the DragonBack Management Platform, to other funds looking for the infrastructure and support new launches.

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