Asian hedge funds run by Vulpes Investment Management, Ballingal Investment Advisors Ltd. and Riley Paterson Investment Management rose this month as managers profited from the worst rout in equity markets since 2008.
Vulpes’s long Asian volatility and arbitrage fund, LAVA, advanced 5 percent in the month through Aug. 10, said Stephen Diggle, the firm’s founder. Ballingal’s BIA Pacific Macro Fund rose about 4 percent, said two people briefed on the return who asked not to be identified because the information is private. The Riley Paterson Asian Opportunities Fund gained 2 percent in the same period and the Iridium Alpha Fund advanced more than 6 percent, according to their managers.
The MSCI Asia Pacific Index declined 11 percent this month to yesterday as Standard & Poor’s downgraded the U.S. credit rating and a slump in Italian and Spanish debt intensified threats to the global economy. Last week’s drop was the biggest weekly decline for the gauge since October 2008, when credit markets froze after the collapse of Lehman Brothers Holdings Inc.
“The consequences for Asia of a return to recession in Europe and the U.S.A. would be significant, both in terms of real economic activity and in capital flows,” Daren Riley and Stewart Paterson, the Singapore-based founders of Riley Paterson, said in a newsletter sent to investors on Aug. 10. “We will endeavor to capitalize on the current market turmoil.”
‘Lack of Policy’
More of Riley Paterson’s portfolio wagered on falling, rather than rising, shares during the first week of August, the managers said. Long-short managers buy stocks they expect to rise and hedge those bets with sales of borrowed shares they hope to buy back at a cheaper price.
“The American debt downgrade, while not unexpected and not necessarily an ‘event’ in itself, has focused the market’s attention on the lack of policy options open to the U.S. government,” said the managers, who analyze macroeconomic cycles before betting on the market.
Sovereign and bank credit-default swaps surged after the Federal Reserve’s pledge to hold borrowing costs close to zero for two years added to concern of a double-dip recession. Fed Chairman Ben S. Bernanke said on Aug. 9 the central bank would hold its target rate for overnight loans between banks at a record-low of zero to 0.25 percent in an effort to revive a slowing U.S. economy and aid global growth. The European Central Bank stepped in to stall the crisis by buying Spanish and Italian sovereign debt this week.
“With several supposedly ‘core’ European economies having economic fundamentals more akin to the ‘periphery,’ the potential for a third world style debt trap to develop is becoming increasingly evident even to the most fanatical euro enthusiasts,” Riley Paterson said. “While global markets might have been willing to turn a blind eye to events in Greece, Portugal and even Spain, Italy and France are of a completely different scale.”
The VIX, a measure of market volatility known as Wall Street’s “fear gauge,” soared 50 percent to 48 on Aug. 8, the biggest gain since February 2007.
Vulpes’s volatility fund, which uses options to bet on fluctuations in the price of securities, profited from the price swings and disparities in the price of Asian stocks, said Diggle, who is based in Singapore. It also made money from wagers on sovereign debt in Europe, the U.K. and Australia as well as European bank credit-default swaps. The fund maintains its bets that gold and oil prices will rise with “inflationary pressures building,” he said.
“Three years ago the selling was driven by deleveraging or margin calls, whereas this past week it has been more reflexive as investors sell in fear of a repeat of 2008,” Diggle said. “The simple truth is, this time around, it is different; now it’s governments who look most likely to fail.”
The Dymon Asia Macro Fund gained about 0.5 percent this month through Aug. 11, bringing its return to more than 15 percent this year, said Danny Yong, chief executive officer of Singapore-based Dymon Asia Capital, which manages almost $1.3 billion.
The fund, which is betting on stronger Asian currencies, profited from the yuan’s advance. The yuan strengthened beyond 6.4 per dollar yesterday for the first time in 17 years.
“Given what happened in equities in the past week, in the coming weeks and months investors will be focused on the preservation of capital as well as a better store of wealth,” said Yong. “Everyone is convinced they don’t want the dollar and Europe is still sorting out its own issues.”
Iridium, an equity hedge fund focusing on commodities-related industries, made money from bets that “centered around the derating of container shipping, agricultural and selective mining companies with poor cost management,” said Jason Wang, chief executive officer of Singapore-based Iridium Asset Management.
Ballingal’s fund, which seeks to profit from broad economic trends, rose 1.3 percent this week through Aug. 10, adding to last week’s 2.8 percent gain, the people said. Hong Kong-based Chief Investment Officer Andrew Ballingal declined to comment.
Azentus Capital Management Ltd., the $2 billion Hong Kong-based hedge fund led by former Goldman Sachs Group Inc. proprietary trader Morgan Sze, lost 0.26 percent between July 29 and Aug. 5, said a person with knowledge of the matter. The fund, which has stopped taking new money from investors, has recovered the loss this week and generated a positive return for the month as of yesterday, the person said. Sze declined to comment.
Janchor Partners Pan Asian Fund, with assets of about $1 billion and run by John Ho, former Asia head of the Children’s Investment Fund Management UK LLP, fell less than 1 percent last week after returning 9.2 percent after fees in the first seven months of the year, said a person familiar with the fund, asking not to be identified because the information is private. Ho, who is based in Hong Kong, declined to comment.
Canning Park Capital’s CCP Asian Opportunities Fund, which trades the equities of large-capitalization companies in Asia, fell 0.3 percent this month through Aug. 10, said Jason Rich, the firm’s Sydney-based chief investment officer. The fund has gained 4.2 percent this year.
“It’s more difficult and volatile than I’ve ever seen before,” Rich said. “Right now capital preservation is key.”