Requiem for a Hedge Fund Dream

Saka's demise will be far from the last in a world of low volatility, no liquidity and zero yields.

Yet another credit hedge fund closes down in Asia.

First, let's have a moment of silence for the brave folks at Saka Capital, which at one point was referred to by banks as one of the largest credit hedge funds based in Asia. And before we move on with our lives, take a few minutes to understand why this isn't just one more money manager throwing in the towel: Saka embodies all the challenges that suggest many other firms could die before alpha returns to credit markets.

 The Singapore-based asset manager is closing the SakaCapital Liquid Credit Fund and returning money to investors, Chief Executive Officer Assan Din told Bloomberg's Klaus Wille in an interview. The firm will convert to a family office investing for the management team and people close to them. That comes after the fund achieved annualized 7 percent returns in the past six years. Yet as Din himself put it:

“Because of the low interest-rate environment, high valuations across all asset classes and lack of liquidity in the market we believe the return profile of the hedge fund industry will be lower over the coming years.” 

As I pointed out in August, the zero or very low interest rate environment boosts all assets with long duration. That's a killer for long-short hedge funds, which thrive on volatility. And that's part of the reason why Saka's closure could be soon followed by others.

Slow Killer

Volatility in Asian credit markets has progressively dropped, providing fewer opportunities for hedge funds

Source: Bloomberg

Then there's the issue of liquidity. The fund being closed was called liquid credit because there was once such a thing. Now there isn't, and Asia is particularly bad on that front. Not only are bond sales generally smaller in size than in other regions, they disappear after issuance. Banks no longer trade and Asian investors are renowned for holding on to their securities. Worse for hedge funds, it's now nigh on impossible to borrow bonds for shorting. When they are available, the cost is prohibitive. 

This transforms a long-short manager into a trading desk on steroids or a long-only fund. It's hard to generate alpha just by trading and pretty much impossible to do so with liquid bonds when the average yield on corporate debt has dropped by almost a third since the start of 2014.

Fatal Contraction

The average yield-to-maturity of corporate debt in Asia has dropped about 30 percent since January 2014

Source: Bloomberg

Unless they start dealing in ultra-risky stuff such as distressed debt, many more credit hedge funds will suffer Saka's fate before the market returns to equilibrium. In the process, everybody loses.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Christopher Langner in Singapore at

    To contact the editor responsible for this story:
    Matthew Brooker at

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