Like hedge fund firms the world over, mighty Tokyo-based Sparx Group Co. is much smaller than it was this time last year. Still, the firm has maintained more muscle than have most of its immediate rivals. Sparx chief financial officer Mikio Fujii says that’s because of the company’s two-word mantra: “core business.”
“In spite of our drastic downsizing last year, we have kept our key professionals, and we continue to move forward with our growth strategy,” Fujii asserts.
Confident words in the face of a serious blow to assets. Although Sparx tops Alpha ’s exclusive Asia Hedge Fund 25 ranking of the biggest Asia-based, single-manager hedge fund firms for a fourth straight year — with $4.8 billion in assets spread across its three subsidiaries, Sparx Asset Management Co., PMA Capital Management and Cosmo Investment Management Co. — the group has shrunk sharply since the end of March 2008, when it controlled $8.1 billion. The reversal is part of an industrywide trend. One year ago the Asia Hedge Fund 25 managed $52.2 billion in assets; this year the figure is down 42 percent, to $30.1 billion.
[To view the complete rankings of the Asia’s biggest hedge funds, click on 2009 Asia Hedge Fund 25]
Clearly, Sparx, powerhouse though it may be, is feeling the pinch as much as anybody. The firm is publicly traded and over the years has been widely hailed as a growth story, expanding its assets (Sparx had $6.7 billion in hedge fund holdings two years ago) through investor inflows, fund performance and acquisitions. Sparx shareholders have taken a hit too, of course, as the setback has meant the cancellation of the annual dividend payment and as shares have fallen by 52 percent since March 2008. The company, meanwhile, has moved aggressively to shore up its bottom line. In a bid to raise cash, Sparx in February sold a 21 percent stake — worth 62.9 billion won ($48.8 million) — in its South Korean hedge fund subsidiary, Cosmo, and trimmed expenses by cutting salaries and offering voluntary retirement to at least 70 of its roughly 400 employees.
The Asia Hedge Fund 25’s falloff as a whole is substantially bigger than those recorded for Alpha ’s Europe Hedge Fund 50 (“Equal Opportunity Carnage,” June 2009) and Alpha ’s Hedge Fund 100 (“After the Fall,” May 2009), with total assets under management down 30 percent and 24 percent, respectively, for 2008.
Losses among Asia’s biggest firms have wiped out the solid gains of two years in which Asian funds outpaced hedge funds globally — though the Asian hedge fund industry at its crest in 2007 ($111.3 billion in assets) accounted for only 6 percent of the industry’s overall holdings (then $1.86 trillion), according to Chicago-based Hedge Fund Research. Total Asian-focused hedge fund assets had ebbed to about $65 billion by the end of the first quarter of this year.
Despite this seismic shift the Asia Hedge Fund 25 firms collectively paint a familiar picture: All but four appeared on last year’s list, and the top five this year include four repeats. The reason is simple. Most managers suffered substantially — and equally in relation to one another — from performance-based losses, investor withdrawals or both. Among the many losers is Hong Kong–based Value Partners, the No. 2 firm for three years running, which shed 46 percent of its assets. With a long-biased equity strategy focused on China, the company was hurt by the falling markets, and most of its funds were down accordingly. Although Value Partners does some hedging, its managers concede that its strategies, based on finding undervalued companies, are largely directional. The firm’s biggest fund, Value Partners Classic Fund, fell 48 percent. The company — which like Sparx is publicly owned — was able nonetheless to eke out a profit, netting HK$66.6 million ($8.6 million), down from HK$1.42 billion at the end of 2007, because of what chief executive Franco Ngan calls “good expense management.”
Ngan adds that, meager as they were, profits for shareholders were symbolically important: “We want to show them that this business is viable in good and bad times.” (The firm’s shares are down 41 percent since March 2008.)
Singapore-based Artradis Fund Management holds tight at No. 3 for a second year in a row, losing assets overall despite seeing its top two funds, both employing multistrategy, market-neutral arbitrage, return 35 percent and 27 percent by capitalizing on market volatility. Artradis got smaller — its assets dropped by 42 percent — mainly because it was plagued by redemptions. This was a common refrain for firms across the industry last year, as investors cashed out of funds that had strong returns and plenty of liquidity so they could cover losses elsewhere. But the trend was especially evident in Asia. Over the course of 2008, investors in Asian hedge funds withdrew $10.5 billion, or 9.4 percent of total assets, according to HFR; worldwide, investors withdrew $154 billion, or 8.2 percent.
Unlike many of its counterparts in the U.S. and the U.K., Artradis did not attempt to keep investors from fleeing. “We did not gate investors, suspend redemptions or restrict investors in any way — and all redemptions were made in cash, in full and on time,” notes Julian Ings-Chambers, a managing director for the company.
Some Asia Hedge Fund 25 firms followed more nimble strategies than their rivals, adapting quickly to market volatility. The least afflicted players included macro funds, commodities trading advisors and arbitrage funds, such as No. 7 Pacific Alliance Investment Management (see “Secret Asian Man”).
Singapore-based Aisling Analytics manages the $1.2 billion Merchant Commodity Fund, which was up 24 percent in 2008 but down 3.9 percent over the first quarter of this year. Michael Coleman, a former commodities trader for agribusiness giant Cargill who launched Aisling in 2004, makes long and short plays on regional and global commodities and profited on market volatility, despite what he calls “the most difficult trading conditions I’ve ever experienced.” Nevertheless, the highly liquid fund was hit hard with redemptions, and Aisling slips in the ranking to No. 9 from No. 7. “Investors had to go where they could find liquidity,” Coleman notes. “The paradox was that the better-performing funds saw the highest redemptions.”
One reason for the relative liquidity of Asian hedge funds is that the industry is still comparatively new; in much of Asia managers tend to be more willing to set favorable terms to attract investors that otherwise might be afraid to commit. Chua Soon Hock, CIO of Singapore-based Asia Genesis Asset Management and its Japan Macro Fund, which jump to No. 16 from No. 25, promotes clients’ access to their money: “There were times I thought about changing fund terms, but ultimately, I see the liquidity we provide to our investors as part of our value.”
The relatively high concentration of U.S.- and U.K.-based funds of hedge funds invested in Asia helped drive the redemption rate up, because funds of funds as a whole endured bigger withdrawals than most single-manager firms did.
“We saw many managers who had up to 60 percent of their assets from funds of funds,” says Lynda Stoelker, London-based director of Asian-based strategies for Stenham Asset Management’s Asian Fund of Funds Strategies. “A lot of the larger funds of funds that were interested in allocating to Asia gave big sums — from $50 million to $100 million — to Asian-focused funds. That’s come down in many cases by half.”
The Asia Hedge Fund 25 also has a high ratio of long-short equity funds (about a dozen firms rely primarily on this strategy), an approach whose performance has been mediocre over the past year. Long-short equity strategies make up 72 percent of all hedge fund activity in Asia and contributed to more than $29 billion in performance losses in 2008, according to HFR.
Hong Kong–based Tree Line Investment Management saw the performance of its long-short Asia Fund drop by 48 percent, and the firm falls to No. 12 from No. 6 in the ranking. Another long-short Hong Kong management firm, Ward Ferry Management, No. 18, drops nine places; its funds were down anywhere between 32 percent and 62 percent. Three of the four firms that fell off the list this year — Tantallon Capital, Nezu Asia and Helios Capital Management — are devoted exclusively to long-short equity.
Distressed debt is one of the few asset classes that offered happy news. Asia Debt Management Hong Kong (ADM Capital) — No. 4, up from No. 10 — a distressed-debt specialist, increased its assets under management, to $2.2 billion from $1.9 billion. The only other ranked firm with asset gains is Hong Kong–based Penta Investment Advisers, No. 6, up from $1.5 billion to $1.9 billion.
Like those in the U.S. and the U.K., Asian markets were battered by volatility last fall, but recovery and stability have found Asia faster. The MSCI all-country Asia ex-Japan index was up 38 percent this year through early June, and China’s economy has continued to grow through the global downturn. As a result, many funds with market-directional bets that performed poorly in 2008 are doing better this year.
One thing the Asia Hedge Fund 25 list suggests is durability. Despite huge losses, no major Asia-based hedge fund closed shop or returned money to investors so that managers could start over. And the very liquidity that created enormous redemptions may be the springboard for heightened credibility going forward. “Ultimately, the burn rate for investors in U.K. and U.S. funds may be higher, because of ill will from gates and lockups,” Aisling’s Coleman notes.
