By Linette Lim | Posted: 24 March 2012 0010 hrs
Article from Channel News Asia
SINGAPORE : Hedge funds have regained some momentum in Asia. They have attracted net fund inflows of about US$600 million since the start of the year.
This compared to outflows of US$2.7 billion seen in the last quarter of 2011, according to data compiled by industry tracker Eurekahedge.
A hedge fund employs advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets to maximise return on investment. It differs from mutual funds in that it is also open to a limited number of investors and requires a very large initial minimum investment.
However, despite the pick up in activity, analysts said hedge funds have lost their shine with investors.
Singapore-based hedge fund firm Asean Investment Management was bullish on Vietnamese stocks when it tumbled by about 50 per cent in 2011.
Their bets paid off when the market rebounded, gaining more than 20 per cent since the start of 2012.
The firm has since posted returns of about 25 per cent on its Vietnamese investments.
This is compared to its investment returns of 10 per cent in Thailand and 3 per cent for Indonesia.
David O'Neil, chief investment officer of Asean Investment Management, said: "So we have been deploying aggressively into Vietnam since December - which was at the bottom. We have around 55 per cent weighting at this point, and that is contributing massively to our performance. We have underweighted the expensive markets that we have made a lot of money on over the years like Thailand and Indonesia."
While some hedge funds are winning big, most others are languishing in losses.
More than 140 Asia-focused hedge funds shut down last year, due to the high market volatility which dampened investor sentiment.
Analysts said this is part of the natural cycle to weed out underperforming hedge funds.
Farhan Mumtaz, a hedge fund analyst at Eurekahedge, said: "Year-to-date Asian (hedge fund) launches are around 30...but the closure activity is keeping pace with that. Hedge funds have not performed that well - especially Asian hedge funds. They did not perform up to the mark in 2011, so they were already under pressure."
Overall, hedge funds have not regained their peak asset levels in 2007.
Hedge fund firms used to make 20 per cent in performance fee during those good times.
But Credit Suisse said that by the end 2011, 67 per cent of global hedge funds were performing below their peak levels and 13 per cent have not earned a performance fee for four years or more.
Analysts said investors have lost confidence in such investments in recent years.
Bernard Lee, CEO of HedgeSpa and research fellow at ITI @ SMU, said: "Over time, the overall performance of all these wonderful ideas looks more and more like a basket of index...Then why don't you invest directly into the index, why do you want to pay - in some cases - two layers of fees in order to get roughly the same performance?"
Hedge funds are now going into less crowded markets in Asia in search of higher returns.
For instance, Asean Investment Management predicts that Vietnam stocks will outperform other ASEAN markets over the next three years.
Meanwhile, Eurekahedge said it expects the number of launches to increase further.
This on the back of new US regulations such as the Volcker rule which will kick in around the middle of this year.
The Volcker rule is widely referred to as a ban on proprietary trading by commercial banks, whereby deposits are used to trade on the bank's personal accounts.
Analysts said this may result in proprietary trading desks of banks being spun off into standalone hedge funds.
Mr Farhan said: "We have seen that over the last year, a number of the star traders in the large investment banks or large trading houses have left those institutes and started up their own hedge funds, so we see that happening to a greater extent in 2012."
- CNA/ms
Article from Channel News Asia
