Popularity of Asian-Focused Hedge Funds Grows

Dec 22 2005 | 6:00pm ET

By Deirdre Brennan 

It's no surprise that there has been a flurry of Asian-focused hedge fund launches in recent months. Hennessee Group's Asia-Pacific Index is showing year-to-date returns of 13.65%, second only to its Latin American Index, which has posted 18.48% returns YTD.

Nick Azari, chief operating officer of Aperta Asset Management, which launched a Japanese long/short equities fund April 1, said "our fund is doing extremely well. We are up about 25% in less than 9 months... Just this month we are up 6.5%."

"As you know, Japan is very hot right now, there is huge interest. The number of long/short Japan funds is very small compared to the U.S., which has 4,000-5,000," he said, adding that Japan's stock market cap is one-half that of the U.S.'s, but there are only 100-150 long/short Japan funds. "So as you can tell, it is fairly underrepresented." 

Alain DeCoster, a principal at ABS Investment Management, which also launched a long/short Asian equities fund early this year, just returned from a two-week trip to the region. He concurs that interest from U.S. investors is growing. "We've been investing in Asia since 1994," he said of his firm, which has over $800 million in assets under management. "This is our third trip this year, and I think there is way more interest than in the past from U.S. institutional investors."

Azari attributes Japan's draw for hedge funds to several factors, including recent developments unrelated to the financial markets. "Internal Japan issues have been resolved, political issues have been cleared up," he said, adding that there has been a lot of progress in corporate governance. Azari, who travels to Japan four or five time a year, said that there is very little coverage coming out of the sell-side on Japanese companies, "so that offers a good opportunity to extract alpha basically by visiting companies and talking to the management."

Other indicators that Asia is becoming a big player in the hedge fund market include the recent announcement that the CFA Institute, which represents certified financial analysts around the globe, is establishing an advocacy center in Hong Kong to cover the Asia-Pacific region. Its first project will be to introduce standards to the hedge fund industry. And just this week Tremont Capital Management said that it was setting up shop in Hong Kong in order to target Asian private banks and institutional investors for its fund-of-hedge fund products.

The China Effect

Despite his optimism on investing in Asia, DeCoster warns that people shouldn't confuse the massive growth in China's economy with increased sophistication in the region's financial markets.

"Everybody understands the growth in China, but it's not easy to make money in Chinese financial markets, so there is a disconnect between what you see in the economy and the financial markets," said DeCoster. "I think a lot of people assume that because a country or region is growing that the financial markets are booming, and that's definitely not the case. You have to be very careful about how you select managers and also, to be conscious about the set of opportunities."

Azari doesn't discount the effect the neighboring economies have on one another. "China has a major effect on Japan. China is the first import partner of Japan and the third export partner, so that is helping Japan a lot," said Azari.

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