Asia Hedge Funds, Among Worst Performers, Close at Faster Rate

By Netty Ismail

Sept. 30 (Bloomberg) — Asia hedge-fund closures jumped 19 percent this year, with the industry set to shrink for the first time as clients withdraw more money after funds in the region underperformed rivals in the U.S. and Europe.

“It is likely that we’ll see a net reduction in the number of Asian hedge funds through this current year,” Peter Douglas, principal of Singapore-based hedge fund consulting firm GFIA Pte, said in an interview yesterday. “Almost without exception, the managers that we talk to in Asia are seeing capital outflows, some of it is minor, some of it major.”

About 70 hedge funds in Asia have shut down as of August, an increase from 59 in the first eight months of last year, according to Eurekahedge. There are 618 Asia-focused managers managing 1,199 hedge funds, compared with 1,196 funds in December. Assets under management fell to $168 billion in August, from $176 billion at the end of 2007, according to the Singapore-based hedge fund research and publishing company.

Asia’s hedge-fund managers — more than half of whom trade only equities — have underperformed their U.S. and European counterparts whose more diverse strategies allowed them to profit from turmoil in financial markets. Asia’s hedge-fund average returns fell 12.6 percent this year, compared with declines of 0.1 percent in North America and 5.8 percent in Europe, Eurekahedge said. Asia gained 18 percent in 2007, outperforming both regions.

More Redemptions

Investors may pull more money out of funds after U.S. lawmakers rejected a $700 billion financial-rescue plan aimed at preventing the world’s largest economy from slipping into a recession. The Standard & Poor’s 500 Index had its biggest drop since 1987 after the package was voted down.

The legislation would have given Treasury Secretary Henry Paulson broad authority to buy troubled assets from financial companies to help ease a lending crunch triggered by the decline of the housing market.

“There will be more redemptions going forward,” said Melvyn Teo, a director at the BNP Paribas Hedge Fund Centre at Singapore Management University who researches the industry. “A lot of the investors in funds in Asia are from the West; with a U.S. recession, liquidity will dry up and they will have to redeem their hedge fund investments, even if those investments are doing okay because they need funds urgently.”

Attrition Rate Rising

Asian hedge funds have done better in preserving capital in the credit crisis than other regional investments such as mutual funds, which have lost 33 percent in the last 12 months, Douglas said. The stock market meltdown helped push Lehman Brothers Holdings Inc. into bankruptcy and Merrill Lynch & Co. into a takeover by Bank of America Corp.

“Up to now, attrition in the Asian industry has been low compared with global norms because it’s a young industry,” said Douglas, who is also Asia’s representative to the Alternative Investment Management Association, the $1.9 trillion hedge fund industry’s largest trade group. “That’s changed and the attrition rate in Asia has been accelerating towards developed- market standards, and may even overshoot.”

Unigestion Holding SA, which invests $3.5 billion in hedge funds worldwide, hasn’t pulled money out of Asia because most of its investments are in managers that trade futures, and those who seek to profit from broad economic trends by trading stocks, bonds, currencies and commodities, said Stefano Pizzo, a Singapore-based managing director at the firm. These strategies have outperformed managers who bet on gains in stock prices, which Unigestion has had little “exposure” to, he said.

`Increasing Our Investments’

“Net-net, we’re probably increasing our investments,” Pizzo said in an interview yesterday. “Redemptions are going to be selective, having a larger impact on the long-bias hedge funds than other strategies.”

Pizzo moved to Singapore last year from Geneva, where Unigestion is based, as the asset manager seeks to boost its investments in hedge funds in the region, beyond just Japan. The firm has increased its investments in Asia-focused hedge funds to 5 percent of its global portfolio in the last two years.

“The industry is going to mature,” Pizzo said. “You’re going to see the difference between the long-bias strategies and more sophisticated propositions, between those who are really good and those who have been riding the wave and shouldn’t be where they are.”

Hedge-fund assets in Asia have increased by more than three times and the number of funds more than doubled since December 2003 as share prices surged, until a year ago.

“Within the global hedge fund industry in the last two to three years, the hot place to be has been in Asia,” said Douglas, who started GFIA a decade ago. “It’s inevitable that some of that froth comes off a bit.”

To contact the reporter on this story: Netty Ismail in Singapore
Last Updated: September 29, 2008 23:21 EDT