Business | Investment
It's getting harder for alternatives
This year has not been kind to the reputation of alternative investments in Asia, but interest in the sector is still there.
- By Andrew Wood, Financial Times
- Published: 00:01 August 9, 2008
This year has not been kind to the reputation of alternative investments in Asia, but interest in the sector is still there.
The consultants Celent and HedgeFund.net estimate that the average Asian hedge fund lost 8.1 per cent in the first quarter of this year, compared with losses of 3.1 per cent in Europe and 2.2 per cent in North America.
Long/short strategies dominated Asian hedge funds. They did very well during 2007's massive bull run, when Asian markets seemed to ignore the growing subprime-related problems that dragged US share prices down.
Asian equities have since lost their immunity to subprime worries - the MSCI Asia Pacific index has become increasingly correlated this year with the S&P 500, and cynics say many of Asia's hedge funds look increasingly like very expensive tracker funds.
That is making it difficult for new funds to get off the ground in Asia.
"Capital is very scarce," says Paul Smith, director of Asia Alternative Asset Partners, in Hong Kong, who has worked in hedge funds since the mid-1980s. "I can't remember it ever being harder."
He describes AAAP - also known as Triple A - as a "hedge fund venture capitalist" that invests in Asian start-up funds and helps to market their products inside and outside the region. It has raised $100 million as seed capital so far and Smith says the fund is on track to raise another $200 million by the end of October.
"Asian institutions don't invest in Asia, in general, so it's always difficult to raise capital. But European and North American asset allocators are also sitting on their hands. It's not that capital has disappeared, but it's not moving around.
. . . So if you have capital, and your raison d'être is to seed hedge funds, you are the prettiest girl at the dance," he says.
Asia's hedge fund industry is at a similar stage of development to alternative investment in Europe and North America between five and 10 years ago, he says, and shows similar potential.
The credit crunch does not seem to have affected confidence in private equity in Asia. Private equity funds in the region are relatively resilient compared with counterparts in North America and Europe because they tend to focus more on growth equity than on leveraged buy-outs that depend on the availability of credit.
Baring Private Equity Asia's latest growth fund raised $1.52 billion in May, was oversubscribed by 50 per cent and was three times bigger than its previous fund. Approximately half the investors came from North America, a quarter from Asia and a quarter from the Middle East and Europe.
Target sectors included alternative energy, media, financial services and industrial and consumer firms, with operations in China, India, Japan, Hong Kong, Taiwan or south east Asia. Jean Eric Salata, BPEA's founding partner and chief executive officer, says the idea is to provide financing and strategic advice to help build Asian-based companies into world-class businesses.
Entrepreneurial companies in mainland China in particular are receptive to the idea of private equity capital. "These companies continue to grow and take market share away from inefficient state-owned enterprises. The state banking sectors don't address the needs of the private sector very well," Salata said at the launch.
That is helping to make China one of the hottest private equity markets in Asia. Shares in Shanghai may have plunged by more than 50 per cent since the market peaked in October, and the number and volume of initial public offerings have fallen sharply. Debt markets are tricky. But the economy is still growing at 10.1 per cent a year, and there are plenty of companies looking for cash to help them expand. They find it difficult to borrow from reluctant banks, who are also less able to lend anyway because Beijing keeps tightening reserve requirements to try to control annual inflation at 7.1 per cent.
"We like the opportunities in China," says Chris Gradel, one of the founders of Pacific Alliance, a hedge fund and private equity company that manages $4.5 billion of assets in China and Vietnam.
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