For the first time in several years, investors have begun expressing an interest in opportunities in Asia. Investors have shared increasing concerns about the high valuations of both the US equity and fixed income markets (pushed further by the Trump rally in the U.S. equity markets). In addition, as many U.S. and European based managers’ performance has lagged, investors have looked to diversify their portfolios and enhance returns. Evidence of asset flows into a strategy or region usually takes about 9 to 12 months to materialize due to the lengthy due diligence period of most hedge fund investors. We expect to see data reflecting this shift toward Asia around the end of 2017 and into 2018.
Q1 2017 – Huge Page Of Hedge Fund Letters, Conferences, Calls, And More
The Asian hedge fund industry comprises approximately 4% to 5.5% of the $3 trillion in global hedge fund assets based on data provided by two of the largest hedge fund databases. Asia is significantly underrepresented in most investors’ portfolios considering it produces approximately 36% of world GDP and the IMF expects Asia to contribute nearly two-thirds of economic growth in the next five years. This forecasted disproportionate share of global GDP growth reflects a strong long term trend driven by favorable demographics of a younger population and higher birth rates compared to western countries.
This under exposure to Asian hedge funds has increased over the past couple of years as investors shifted assets out of Asia and into North America and Europe, in response to Asian equity markets lagging the performance of the S&P 500 index. However, this has also caused Asian equity valuations to look increasingly more attractive. For example, comparing equity valuations and growth rates of the two largest economies earlier this year showed China’s GDP growing at a 6.2% rate versus the U.S.’s GDP growth rate of 2.3%, while China PE ratios were approximately 8.3 versus the S&P 500 PE of 18.3. This disparity in valuation is not limited to just the equity markets, and can be seen in other asset classes as well. Over the past 10 years we have seen the Asian hedge fund industry become more diversified from a strategy perspective. In addition to long/short equity there are many strategies including, distressed debt, activist, convertible bond arbitrage, credit, quantitative, muti-strategy, and market neutral equity among others.
Bridgewater Reveals Uncorrelated Strategy, Volatility & Beta Targeting
In addition to more attractive valuations, Asian markets also offer more inefficiencies in security selection, because only a small fraction of the hedge fund industry focuses on these opportunities. It is difficult to find U.S. managers that have outperformed the S&P 500. In contrast, there are many Asian managers that have outperformed their benchmarks by wide margins, adding significant alpha.
It is not a surprise that Asian based managers are underrepresented in U.S. portfolios given the physical distance and the difficulty in obtaining information on these managers. The good news is that a large number of Asian managers are concentrated in two cities, Hong Kong and Singapore. This makes it fairly easy to meet with many of the top managers in a short period of time. Preqin’s database shows there are 57 hedge funds with at least $1 billion in assets under management in Asia with 61% located in Hong Kong and 14% located in Singapore. Of the remaining 25%, a number of them also have offices in one of these two cities. Given the opportunities, most large allocators to hedge funds should consider traveling to these cities once or twice a year.
Q1 2017 - Huge Page Of Hedge Fund Letters, Conferences, Calls, And More
In conducting our own search for Asian managers, we have historically found information on Asian based managers to be less readily available than those based in the U.S. and Europe. For example, only about 30% of the Asian based hedge funds we researched had updated information in one of the major hedge fund data bases. In order to find the highest quality managers in Asia investors should not only leverage multiple hedge fund data bases, but also speak with prime brokers, review several hedge fund trade publications, spend time searching on the internet and speak with other investors. Clearly, more time is required to identify and access Asia-focused funds. Ultimately for those willing to put in the work, we believe it will identify a number of very high quality hedge funds they would not otherwise come across.
In summary, we believe there are compelling reasons for investors to look at hedge funds focused on Asia. Two observations we discovered during our recent research process included: first, there is large number of high quality managers in Asia that are not broadly known by U.S. and European investors and second, there is tremendous opportunities to deploy capital by Asian based managers in a variety of strategies.
About the author
Donald A. Steinbrugge, CFA – Managing Partner, Agecroft Partners
Don is the Founder and Managing Partner of Agecroft Partners, a global hedge fund consulting and marketing firm. Agecroft Partners has won 34 industry awards as the Hedge Fund Marketing Firm of the Year. Agecroft is in contact with over a thousand hedge fund investors on a monthly basis and devotes a significant amount of time performing due diligence on hedge fund managers. Don frequently writes white papers on trends he sees in the hedge fund industry, has spoken at over 100 hedge fund conferences, has been quoted in hundreds of articles relative to the hedge fund industry and is a regular guest on business television.
Highlighting Don’s 32 years of experience in the investment management industry is having been the head of sales for both one of the world’s largest hedge fund organizations and institutional investment management firms. Don was a founding principal of Andor Capital Management where he was Head of Sales, Marketing, and Client Service and was a member of the firm’s Operating Committee. When he left Andor, the firm ranked as the 2nd largest hedge fund firm in the world. Previous to Andor, Don was a Managing Director and Head of Institutional Sales for Merrill Lynch Investment Managers (now part of Blackrock). At that time MLIM ranked as one of the largest investment managers in the world. Previously, Don was Head of Institutional Sales and on the executive committee for NationsBank Investment Management (now Bank of America Capital Management).
Don is a member of the Board of Directors of Help for Children (Hedge Funds Care), Virginia Home for Boys and Girls Foundation and the Child Savers Foundation. In addition he is a former 2 term Board of Directors member of the University of Richmond’s Robins School of Business, The Science Museum of Virginia Endowment Fund, The Richmond Ballet (The State Ballet of Virginia), Lewis Ginter Botanical Gardens, The Hedge Fund Association and the Richmond Sports Backers. He also served over a decade on the Investment Committee for The City of Richmond Retirement System
Donald A. Steinbrugge, CFA
Managing Partner
Agecroft Partners, LLC
103 Canterbury RD
Richmond, VA 23221
804 355 2082
[email protected]
Gaining the Edge- 2017 Hedge Fund Investor Leadership Summit – Nov. 2nd/ 3rd NYC
Hedgeweek Global Awards 2017, 2016, 2014, 2013, 2012 and 2011 Third Party Marketer of the Year
International Hedge Fund Awards 2017, 2016, 2015, 2014 and 2013 Third Party Marketer of the Year - US
Hedgeweek US Awards 2015, 2014, 2013, 2012 and 2011 Third Party Marketer of the Year
HFMweek 2015, 2013, 2012, 2011, 2010 and 2009 Best Third Party Marketer
