Asian Hedge Funds Ditch Short-Selling for Long-Only Game
Some of Asia’s oldest hedge funds are ditching short-selling as investors pull out of the strategy on concerns that bearish bets are failing to pay off and not worth the hefty fees they bring.
The move from the traditional hedge fund structure to long only investing is part of the growing shake-out of Asia’s $124 billion industry, and is a potential blow to the investment banks supporting the sector.
Nearly 40 percent of hedge fund assets in Asia are still parked with long/short managers who aim to make money in any kind of market, by betting both for and against publicly traded companies. Funds that combine long and short investing command twice the fee of a long-only, non-benchmark fund.
But few Asian funds are seen as having the stomach or the expertise to put on effective bearish bets. Short selling involves selling borrowed shares, and buying them back later when the price falls, with managers pocketing the difference.
The strategy can be profitable, but a failed short bet can be very damaging, especially in a volatile market like Asia.
Adding to the challenges is that Asia has varying short-selling rules and certain countries that bar the practice.
While the long-only bias has been a factor in Asia for years, analysts tracking the sector say last year’s losses coupled with the current market volatility presents Asia’s hedge funds with a stark and immediate choice: shut down, cut fees or convert to long-only.
Tantallon Capital, which managed $1.7 billion at its peak, will give up shorting from next month. Others such as Indea Capital, which once held $750 million in its hedge fund, and ARN Investment Partners, are shutting down their long/short equity funds and have decided to focus on long-only products.
The shift from long/short will also cut leverage and stock lending opportunities for prime brokers such as Goldman Sachs and Morgan Stanley that service hedge funds.
Long/short hedge funds are a major contributor to prime brokerage industry revenues and banks’ fee pools.
“Investors are increasingly seeking alternatives to hedge funds, and are looking for intelligent ways to access Asian growth,” said Peter Douglas, founder of hedge fund consultancy GFIA. “Long-only unconstrained strategies are a natural beneficiary of these trends.”
Long-only funds that can invest in a broad range of stocks, such as Singapore-based Arisaig and the Asia Landmark Fund of fund firm New Silk Road Investment, are hitting all-time peak assets, even as Asia’s hedge fund industry remains nearly $50 billion below its pre-crisis assets of $176 billion.
Assets in long/short funds have halved to about $47 billion over the past four-and-a-half years. Of the 47 Asian hedge funds that have shut this year, 33 are long/short funds, according to industry tracker Eurekahedge.
Long/short funds typically charge a 2 percent management fee and 20 percent performance fee, double the fees for the “1 and 10” long-only fundies. These long-only funds differ from mutual funds as they don’t follow any benchmark index, promise absolute positive return and charge performance fees.
Investors have complained for years that most long/short hedge funds in Asia are really long-biased funds — pursuing the same strategy as a long-only fund, but leveraging up their bets to bolster returns. Eurekahedge estimates at least 70 percent of such funds are really long-biased funds.
Traditionally, a lack of liquid stocks and tools, as well as restrictions on short-selling in countries such as Korea and Japan, have been impediments to short-selling in Asia.
More recently, the flood of money unleashed by central banks to tackle the global financial crisis has hurt stock pickers, boosting all stocks together and making short bets more difficult.
“The current market is largely dictated by macro,” said Lawrence Ka, a senior portfolio manager at Hong Kong-based fund of hedge funds manager Penjing Asset.
While some mega hedge funds could create some short-term trends with collective bets, this was unlikely in Asia.
“If you are a small long/short manager, it is very difficult to fight this battle. That’s one of the reasons why some managers are sticking to long-only,” he said.
In a letter to investors titled “time for a change”, Nicholas Harbinson, a former Merrill Lynch and Goldman Sachs executive who founded Tantallon in 2003 with former Morgan Stanley executive Alex Hill, told clients that short selling had been a distraction and had cut gains from a long-only portfolio.
A long-only Tantallon Fund would have generated a 143 percent return since launch, he said. Instead, the long/short fund produced a 55 percent gain since its inception in late 2003 through May 2012. Its assets have fallen to just $35 million from $1.6 billion in 2007 as investors have put their money elsewhere, data compiled by Reuters showed.
“Shorting is possible. Some people do it exceptionally well,” Singapore-based Hill told Reuters. “Our experience though has been that we, while profiting from shorting from time to time in extreme periods, have found that over the longer run, our long only performance is better than the combined long and short performance.”
Raj Mishra, founder of Singapore-based Indea Capital, told clients in a letter last month that “shorts have been a drag on performance” of his long/short funds, while the long-only strategy had produced an excess return of 92 percent over the last 92 months. He will focus on long-only funds from July 1.
“The economics of maintaining a fund which is not of big size is not favorable. Also, not a lot of assets are going to long/short funds so then why waste our time there?” Christopher Wong, fund manager at ARN Investment Partners, said.
Wong is shutting down his long/short hedge fund ARN Asian Enterprise after its assets fell to just $26 million from the more than $500 million it managed in 2007. He will now focus on his long-only ARN Newly Industrialized Economies Fund.
Long-only players have grown assets under management.
Arisaig Asia Consumer Fund has increased its assets to $2.4 billion from about $1.6 billion two years ago. AR New Asia Fund has tripled assets to $600 million-plus in the last three years.
Other big Asian players include Singapore-based Arohi Asset, with $743 million at the end of December, and Hong Kong-based Overlook Investments, with $1.9 billion, according to filings with the US Securities and Exchange Commission.
The shift has also benefited smaller players such as Singapore’s One North Capital, which has grown assets more than nine-times to $90 million from its launch three years ago.
Albizia ASEAN Opportunities has grown assets to about $75 million from $9 million two years ago.
“There is an oversupply of long/short equity in Asia compared with the demand so it’s an incredibly difficult place to raise assets, whereas there’s a relatively small supply of good quality, unconstrained long managers,” Douglas of GFIA said.
“That’s really the only bright spot to be honest,” he said.