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Thursday 16 October 2008
Suffering Asian Hedge Funds Look To Stem Redemptions
Asian hedge funds, already hurt by market volatility and newly-introduced short-selling restrictions, are now getting hit by a sharp uptick in redemptions.
Suffering Asian Hedge Funds Look To Stem Redemptions
16 October 2008
Asian hedge funds, already hurt by market volatility and newly-introduced short-selling restrictions, are now getting hit by a sharp uptick in redemptions.
Due to losses and redemptions, the region’s hedge fund assets have shrank by 8.4% to $175.7 billion in the first half of the year, from $191.7 billion, according to Asia Hedge. That figure is expected to drop sharply in the second half of the year.
Deleveraging, counterparty risks, market beta, newly introduced short-selling restrictions and redemptions are affecting the industry the world over, but hedge funds in Asia are proving particularly vulnerable. This is mainly because Asian hedge funds tend to hold more long positions, markets are less liquid and managers, on average, have less experience.
According to Eurekahedge, hedge funds in the region are down about 12.6% between January and August. Compare that with the Eurekahedge Hedge Fund Index, measuring funds globally, which is down 3.37%. The Eurekahedge North American Hedge Fund Index is down 0.15%, while the European Hedge Fund Index is down 5.9%.
“In Asia the worry is that the hedge fund industry is less mature and much more long-biased and directional than in more mature U.S. and European markets. Counterparty risks are perceived higher,” said Sassan Zaker, head of hedge funds as Julius Baer.
In efforts to stem losses, some hedge funds have been changing redemption policies, angering investors in the process. Hedge fund investors said that some hedge funds have imposed redemption gates, effectively extending the redemption period and lengthening investors’ market exposure against their will. Others have introduced side-pockets with indefinite illiquidity.
In Hong Kong, Atlantis Investment Management Ltd. temporarily froze redemptions on one of its funds after seeing losses of about 60%. A representative from the firm was not immediately available to comment.
Another fund, Merlin Investment Fund, managed by Monterrey Investment Management in Melbourne, distributed corporate notes instead of cash to investors who were trying to redeem holdings. Investors ultimately were able to redeem only a fraction of their holdings in cash.
The industry’s woes come at a time hedge funds had been steadily growing in popularity in Asia, but this year’s rocky performance is likely to reverse this trend for a while.
“Hedge fund investors are being very cautious at this time,” said Joseph Pacini, Head of Alternative Investments for J.P. Morgan’s Private Bank in Asia. Investors have been concerned that hedge funds with a lot of risk or excessive leverage are “most likely to have had difficulties this year,” he said.
Hedge Fund Closures Outnumber Openings
As long as unpredictable market and regulatory conditions continue, hedge funds in the region are expected to continue to suffer. Growth in Asia’s relatively new hedge fund industry is expected to grind to a halt this year as the number of closures outnumbers openings. Asia Hedge confirmed at least 56 hedge fund shutdowns so far this year, but just 39 startups. In 2007, there were 46 fund shutdowns and roughly twice as many fund startups. At least half of all hedge funds in the region are equity long-short funds, meaning they focus on holding stocks either long or short. Adding to the distress, many funds are “long-biased” - holding mostly long positions.
It hasn’t helped Asian funds that equity long-short hedge funds have seen by far the most redemptions, according to Lipper, losing US$15.1 billion to net redemptions during the second quarter alone. Not all hedge fund strategies are hurting badly; global macro and managed futures funds are seeing gains and inflows but such strategies are less common in the region.
In addition to the wave of redemptions, Asian hedge funds are also bracing against newly-introduced short-selling bans which have been introduced in Australia, Taiwan and South Korea. Adding to the headache, markets in Asia are less liquid, so it’s even harder for funds facing redemptions to cough up the cash to pay investors. Some funds facing a wave of redemptions have been forced to sell solid, large cap stocks that are more liquid, cutting further into returns.
“Many large hedge funds have suspended redemptions or have gone out of business. Illiquidity at some hedge funds is rising as redemptions are being paid by selling liquid assets,” said Julius Baer’s Zaker.
One investor noted that hedge funds in the region have massively deleveraged in the last few months. Funds are deleveraging not only due to investor redemptions but also because of pressure from banks tightening credit. Brooke Capital Ltd., based in Hong Kong, is one such example. The firm had kept its portfolio leverage exposure at about 150% earlier in the year but it is now closer to 60% exposed.
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Suffering Asian Hedge Funds Look To Stem Redemptions
16 October 2008
Asian hedge funds, already hurt by market volatility and newly-introduced short-selling restrictions, are now getting hit by a sharp uptick in redemptions.
Due to losses and redemptions, the region’s hedge fund assets have shrank by 8.4% to $175.7 billion in the first half of the year, from $191.7 billion, according to Asia Hedge. That figure is expected to drop sharply in the second half of the year.
Deleveraging, counterparty risks, market beta, newly introduced short-selling restrictions and redemptions are affecting the industry the world over, but hedge funds in Asia are proving particularly vulnerable. This is mainly because Asian hedge funds tend to hold more long positions, markets are less liquid and managers, on average, have less experience.
According to Eurekahedge, hedge funds in the region are down about 12.6% between January and August. Compare that with the Eurekahedge Hedge Fund Index, measuring funds globally, which is down 3.37%. The Eurekahedge North American Hedge Fund Index is down 0.15%, while the European Hedge Fund Index is down 5.9%.
“In Asia the worry is that the hedge fund industry is less mature and much more long-biased and directional than in more mature U.S. and European markets. Counterparty risks are perceived higher,” said Sassan Zaker, head of hedge funds as Julius Baer.
In efforts to stem losses, some hedge funds have been changing redemption policies, angering investors in the process. Hedge fund investors said that some hedge funds have imposed redemption gates, effectively extending the redemption period and lengthening investors’ market exposure against their will. Others have introduced side-pockets with indefinite illiquidity.
In Hong Kong, Atlantis Investment Management Ltd. temporarily froze redemptions on one of its funds after seeing losses of about 60%. A representative from the firm was not immediately available to comment.
Another fund, Merlin Investment Fund, managed by Monterrey Investment Management in Melbourne, distributed corporate notes instead of cash to investors who were trying to redeem holdings. Investors ultimately were able to redeem only a fraction of their holdings in cash.
The industry’s woes come at a time hedge funds had been steadily growing in popularity in Asia, but this year’s rocky performance is likely to reverse this trend for a while.
“Hedge fund investors are being very cautious at this time,” said Joseph Pacini, Head of Alternative Investments for J.P. Morgan’s Private Bank in Asia. Investors have been concerned that hedge funds with a lot of risk or excessive leverage are “most likely to have had difficulties this year,” he said.
Hedge Fund Closures Outnumber Openings
As long as unpredictable market and regulatory conditions continue, hedge funds in the region are expected to continue to suffer. Growth in Asia’s relatively new hedge fund industry is expected to grind to a halt this year as the number of closures outnumbers openings. Asia Hedge confirmed at least 56 hedge fund shutdowns so far this year, but just 39 startups. In 2007, there were 46 fund shutdowns and roughly twice as many fund startups. At least half of all hedge funds in the region are equity long-short funds, meaning they focus on holding stocks either long or short. Adding to the distress, many funds are “long-biased” - holding mostly long positions.
It hasn’t helped Asian funds that equity long-short hedge funds have seen by far the most redemptions, according to Lipper, losing US$15.1 billion to net redemptions during the second quarter alone. Not all hedge fund strategies are hurting badly; global macro and managed futures funds are seeing gains and inflows but such strategies are less common in the region.
In addition to the wave of redemptions, Asian hedge funds are also bracing against newly-introduced short-selling bans which have been introduced in Australia, Taiwan and South Korea. Adding to the headache, markets in Asia are less liquid, so it’s even harder for funds facing redemptions to cough up the cash to pay investors. Some funds facing a wave of redemptions have been forced to sell solid, large cap stocks that are more liquid, cutting further into returns.
“Many large hedge funds have suspended redemptions or have gone out of business. Illiquidity at some hedge funds is rising as redemptions are being paid by selling liquid assets,” said Julius Baer’s Zaker.
One investor noted that hedge funds in the region have massively deleveraged in the last few months. Funds are deleveraging not only due to investor redemptions but also because of pressure from banks tightening credit. Brooke Capital Ltd., based in Hong Kong, is one such example. The firm had kept its portfolio leverage exposure at about 150% earlier in the year but it is now closer to 60% exposed.
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