Looking back on 2012, Value Partners has plenty of reasons to celebrate its 20th anniversary this year. For starters the Hong Kong–based investment firm — co-founded by Cheng Hye Cheah and V-Nee Yeh in 1993 — saw its funds bounce back from a disappointing 2011. Total assets under management climbed more than 19 percent, to $9.3 billion as of April 1, 2013, and Value Partners’ flagship vehicle, the $1.5 billion Classic Fund, earned a 14 percent net return last year after losing 17.2 percent in 2011. Its High-Dividend Stocks Fund almost doubled in size, to $1.1 billion, reaping a 25.2 percent gain.
Staying focused on Greater China, publicly traded Value Partners also continued its expansion throughout that region by acquiring 49 percent of Shanghai-based mutual fund provider KBC Goldstate Fund Management Co. in March 2012. Meanwhile, the 168-employee firm, which has always focused on bottom-up stock picking, put considerable effort into developing new products that include its first qualified foreign institutional investor (QFII) offering, says CEO Wai Ming (Timothy) Tse.
“We don’t have any particular secret, because we have been quite consistent in terms of being value investors,” Tse says of his fund managers’ 2012 performance.
For a fourth consecutive year, Value Partners claims the No. 1 spot in the Asia Hedge Fund 25, Institutional Investor’s Alpha’s eighth annual ranking of the largest Asia-based single-manager hedge fund firms. (The top 25 firms appear in the table at right.)
Asia-focused hedge funds outdid their global peers in 2012, despite macroeconomic and fundraising challenges — and partly thanks to a late rally sparked by policy changes in Japan. With Tokyo finding its feet again as a hedge fund center, Chinese regulators keep nudging Beijing and Shanghai in the same direction. For the first time mainland China is home to two of the top five hedge fund firms.
Last year’s performance was driven by the macro environment, including events in the U.S. and Europe, the leadership change in China and the Japanese election, says Harold Yoon, CIO of Hong Kong–based fund-of-hedge-funds firm Sail Advisors. “More research-focused managers have been able to make returns even in a difficult market,” Yoon explains. When the market improved toward the end of the year, those managers also captured some upside, he says.
“Two thousand and twelve will be remembered for the last quarter, in terms of Japan making things a lot more interesting,” says Hugh Abdullah, Morgan Stanley’s Hong Kong–based head of capital introduction for Asia. “We also saw 2012 as a year where long-short equity performed relatively well.”
The firms in the Asia Hedge Fund 25 managed an impressive $51.9 billion as of April 1, a gain of more than 11 percent in just one year. Aided by some recent high-profile launches, the number of firms on the list with $1 billion or more in hedge fund assets jumps from 12 to 17. But with many U.S. allocators fixated on domestic opportunities, interest in Asian hedge funds is typically manager-specific rather than involving a thematic approach, Abdullah contends.
“There’s a fairly strong disconnect between the performance of Asia-based hedge funds versus the flows into Asia-based hedge funds,” says Joseph Pacini, Hong Kong–based head of the alternative investment strategy group for Asia at $3.86 trillion U.S. asset manager BlackRock. During the first half of this year, North America–focused hedge funds larger than $5 billion claimed the vast majority of global allocations, BlackRock’s research shows.
“What many investors are surprised to find out is that Asia-focused hedge funds outperformed global hedge funds fairly dramatically in 2012,” Pacini says. “And they continue to outperform fairly dramatically through 2013.”
Last year the Eurekahedge Asian Hedge Fund Index gained 9.97 percent, compared with a 6.57 percent advance for the Singapore-based research firm’s global index. (The former index includes hedge funds located outside Asia that invest in the region.) After posting a 5.97 percent gain in 2012, the Eurekahedge Japan Hedge Fund Index was up 18.69 percent this year as of July 31.
Investors appear to be taking notice. Net inflows to Asia-focused hedge funds totaled almost $4.4 billion in the first half of this year after a flat 2012, according to Chicago-based Hedge Fund Research.
Hillhouse Capital Management in Beijing climbs from third to second place, having grown its assets by some 39 percent, to $7.5 billion. Hillhouse displaces Japan’s Sparx Group Co., which drops to No. 3.
A fundamental equity manager, Hillhouse was launched in 2005 by CEO and CIO Lei Zhang, a former employee of the Yale Investments Office. The firm, which has an investment research team of fewer than 20 people, allocated its commingled fund largely in Asia but also worldwide. Most of its clients are global endowments, foundations, family offices and sovereign wealth funds. Hillhouse invests for the long term, selecting high-quality companies in the consumer, media and health care sectors that it believes can weather market downturns and grow in the coming decades. Nearly all of the firm’s growth in 2012 was owing to performance.
Dymon Asia Capital, the Singapore-based macro fund founded by CIO Danny Yong, moves from No. 6 to No. 4. An alumnus of Kenneth Griffin’s Chicago-based hedge fund firm Citadel, Yong reportedly eked out a 1 percent gain last year after returning 20 percent in 2011. But he fared better than the previous No. 4, currency trader Ortus Capital Management. The Hong Kong–based firm’s assets shrank from $3.3 billion to $1 billion, bumping it down to No. 17.
Also new to the top five is Shanghai’s Greenwoods Asset Management Co. (No. 12 last year), whose flagship Golden China Fund gained almost 27 percent. Greenwoods manages $2.1 billion, nearly twice its 2011 total, employing a long-short equity strategy that combines top-down analysis with fundamental research.
Two new $1-billion-plus additions are Myriad Asset Management (No. 10) and Tybourne Capital Management (No. 15), both based in Hong Kong. Carl Huttenlocher, former Asia boss for New York–based Highbridge Capital Management, launched his $1.7 billion Myriad multistrategy fund in late 2011. Tybourne was co-founded by Eashwar Krishnan, previously head of Asia at Greenwich, Connecticut–based Lone Pine Capital. Since it launched last July, the $1.1 billion long-short equity fund has more than doubled its assets.
Asia is seeing a growing number of hedge fund start-ups by managers with experience at local and global firms, says Morgan Stanley’s Abdullah, who thinks the region’s relatively small talent pool keeps improving.
“When a quality Asian manager does come out and ticks all the right boxes, the probability of being able to raise assets increases exponentially, potentially even more so than in the U.S. and Europe, because talent is a scarcer commodity out here,” he says.
Take Guo Feng and Michael Robinson, who intend to spin off Symmetry Investment Management from Israel Englander’s New York–based Millennium Management early next year. The pair appear to be on track to set a record for an Asian hedge fund launch by raising $1.4 billion for their Hong Kong–based firm.
Although long-short equity strategies again dominate the Asia Hedge Fund 25, the local industry continues to diversify. Over the past couple years, the number of relative-value, macro and credit hedge funds has increased significantly, says Sail’s Yoon, whose $2.1 billion firm invests globally for clients in Asia, Europe and the U.S.
Credit funds performed well in 2012, with several reaching between $300 million and $500 million, he notes. “As people were looking around the world for fixed-income opportunities, they started turning their attention to Asia,” Yoon says. “And as the Chinese government started doing more offshore bonds, the credit markets really started to get some inflows.”
Hong Kong remains Asia’s hedge fund capital, home to 15 of the firms on the list, compared with 14 in 2012. Singapore holds steady with four. But Morgan Stanley’s Abdullah has noticed more long-only and macro funds setting up shop in the city-state, the latter partly because many investment banks’ regional fixed-income and foreign exchange desks are based there.
Although Tokyo drops from four firms to three on the Asia Hedge Fund 25, the Japanese hedge fund industry is on the upswing after several tough years that forced many managers to shut down. Headquartered in Tokyo with subsidiaries in Hong Kong and Seoul, publicly traded Sparx Group grew almost 9 percent, to $7.1 billion.
Sparx’s funds started doing better in late 2011, CEO Shuhei Abe says. Their performance kept improving with last December’s election of Prime Minister Shinzo Abe, who has revived the Japanese economy through policies that include devaluing the yen and allowing the Bank of Japan to pursue quantitative easing. “I think he did right and continues to be right so far,” says the Sparx head of his namesake’s so-called Abenomics.
Three years ago Sparx began shifting from a Japan-centric investment strategy to a pan-Asian one — a move that is now paying off. Launched in June 2011, the $12.4 million Sparx OneAsia Long Short Fund finished that year down 12.33 percent. But it gained 4.6 percent in 2012 and was up 11.67 percent year-to-date through July.
Over the next five years, Japan, not China, will drive Asian economic growth, Abe asserts. “Sparx certainly has a very, very strong advantage over our competition pursuing this strategy, doing long-short throughout Asia,” he says, describing the firm as a survivor. “My growth strategy is equities in Japan.”
In 2010, Sparx launched its Smart Grid Fund, which invests in Japanese green energy technology and now manages $700 million. Last year, in response to the 2011 meltdown at the Fukushima nuclear power plant, the firm took its first step into real asset investing with a renewable energy infrastructure fund focused on solar projects. This vehicle now manages $100 million for the Tokyo Metropolitan Government, which is also looking to establish a social infrastructure real estate investment trust with Sparx, Abe says.
During the past few years, the firm has found it difficult to attract overseas capital, he admits. But after losing most of his investors from the U.S., Abe recently traveled there for a week of meetings with potential clients. “I was encouraged that interest in Japan is extremely, extremely strong,” he says, noting that Sparx is considering a relaunch of its pioneering activist fund.
“Over the last decade the hedge fund opportunity in Japan had to some degree been written off by many institutional investors,” BlackRock’s Pacini says. “If Abenomics continues to work itself out, at least there’s been a stabilization within the hedge fund community and maybe a slight improvement.”
Abdullah of Morgan Stanley is seeing hedge fund veterans focused on Japanese securities mostly set up in Singapore rather than Tokyo right now, he says. The easy money stemming from the election is over, Sail’s Yoon warns. For him the small group of trading-oriented funds that exploit inefficiencies in the Japanese stock market offer the best opportunities.
“The inefficiency that we’re focusing on isn’t trying to time the FX market or time the direction of the equity market,” Yoon says. “It’s that classic type of market inefficiency you would have seen in the U.S. ten or 15 years ago.”
In mainland China the nascent hedge fund industry keeps maturing. More often than not, though, China-focused funds headquarter themselves offshore.
But China’s State Administration of Foreign Exchange is granting bigger QFII quotas. Also, the new qualified domestic limited partner (QDLP) program will let foreign hedge funds raise money from Chinese institutional and high-net-worth investors through marketing offices in Shanghai. And this spring the China Securities Regulatory Commission proposed liberalizing the qualified domestic institutional investor (QDII) program, which allows more than 100 mainland institutions to invest offshore.
Pacini deems the Chinese regulators prudent when it comes to hedge funds. “They take steps, assess how it works, and then they allow more flexibility, assess how it works,” he says. “I’m excited about that opportunity set because I think investors in China are looking for this type of investment opportunity.”
Despite such measures, Beijing and Shanghai will need time to bloom as hedge fund centers, predicts Candy Cheung, a manager for Asian portfolios at Sail. Currently shorting of mainland stocks is allowed only through a pilot program that permits limited hedging of A shares by onshore funds, Cheung says. “Until you’re actually able to short individual stocks, it’s hard to significantly grow the hedge fund industry in China.”
With five offices, including those in Beijing, Chengdu, Shanghai and Taipei, Value Partners plans to chase more European and U.S. business in addition to forging ahead with its Greater China expansion, CEO Tse says. Hong Kong accounts for 70 percent of the firm’s assets, with Europe and the U.S. contributing 10 percent apiece. Most of its institutional clients, which include endowments, foundations, family offices and pension funds, come from the latter two regions.
In March, Value Partners used half of its inaugural $100 million QFII quota to launch an A-share private placement fund for institutional investors; the rest went to boost Asian exposure in its existing funds. The firm has also applied for a renminbi qualified foreign institutional investor (RQFII) license so it can raise renminbi funds in Hong Kong and invest them on the mainland.
Even as the Chinese economy slows — real gross domestic product grew 7.5 percent year over year in the second quarter, down from 7.7 percent during the previous three months — Tse doesn’t expect a hard landing. But he plans to keep a close eye on the reforms and policies that he expects the government to introduce over the next two years.
“As investors we have to be aware of the impact,” Tse says. “From those policies sometimes we can find some value stocks and some quite high-potential stocks too.”
