Asia Hedge Funds Face Attrition Amid Most Closures Since ’08

Asia’s hedge-fund industry is set to shrink in 2012 after a year in which growth stagnated, performance faltered and managers struggled to raise capital.

There were 123 Asian hedge funds that closed in the first 10 months of 2011, compared with 125 in all of 2010 and a record 184 in 2008 when the collapse of Lehman Brothers Holdings Inc. roiled markets, according to Singapore-based data provider Eurekahedge Pte. Artradis Fund Management Pte, once Singapore’s biggest hedge fund, shut, while managers returning money to investors included CoreVest Partners and Kilometre Capital Management Ltd.

Asia’s hedge funds are dwindling as most managers haven’t made money as a business or for investors, said Peter Douglas, principal of Singapore-based GFIA Pte. Hedge funds in the region manage $125 billion, lower than the peak of $176 billion in 2007, according to Eurekahedge.

“2012 will be the year of major attrition,” said Douglas, whose firm advises investors seeking to allocate money to hedge funds and runs a wealth-management business. “People’s stamina will increasingly give out; regardless of your commitment and personal wealth, the number of years that you can go pursuing your dream without any kind of compensation is a stretch.”

Asian hedge funds lost on average 8.7 percent in 2011 through November, their second-worst year on record, according to Eurekahedge. The MSCI Asia Pacific Index declined 17 percent during the same period amid concern that the European sovereign-debt crisis would lead to a global slowdown.

Difficult Climate

About 32 percent of Asia-focused hedge funds tracked by Eurekahedge generated positive returns in the first 11 months of 2011, down from 75 percent the year before.

Asian hedge fund startups also slowed. There were 122 new hedge funds in the region last year through October, compared with 183 in all of 2010, according to Eurekahedge.

“The investment climate is difficult with correlations remaining stubbornly high across global markets,” said Ben Williams, a Hong Kong-based director of Asia-Pacific financing sales at Bank of America Merrill Lynch. The first half of 2012 “is not going to be easy performance for anyone.”

About 80 percent of Asia hedge funds are under their high watermarks, the historical peak net asset value above which they can charge performance fees on returns, Williams estimated based on data from Merrill Lynch and hedge-fund databases. Some have yet to rebound above their pre-2008 high watermarks.

Institutional Money

Institutional allocations have preferred bigger managers. Most of the $18.2 billion in capital inflows since the second half of 2009 went to larger funds, Eurekahedge said in a report in October.

Managers that joined the expanding pool of billion-dollar hedge funds in Asia last year included Dymon Asia Capital in Singapore, and Azentus Capital Management Ltd., the Hong Kong-based fund set up by former Goldman Sachs Group Inc. proprietary trader Morgan Sze that raised about $2 billion.

Dymon, which started in 2008 with capital from Tudor Investment Corp., plans to limit the size of its Dymon Asia Macro Fund at $2.5 billion, after assets rose to about $2.1 billion in December, Willy Ballmann, the firm’s chief operating officer said. The fund gained about 20 percent after fees last year, he said.

“In Asia, we have a small number of managers that have been able to generate positive returns during the 2008 crisis and since then,” said Stephane Pizzo, founder of Singapore-based hedge-fund investing firm Lotus Peak Capital Pte. “Those should be able to survive and possibly thrive in 2012, which might be even more challenging than this year.”

Fortress Asia

Money is also flowing to the Asian desks of global hedge funds. Global-mandated funds accounted for 19 percent of the assets in Asia’s hedge-fund industry as of August, compared with 12 percent in 2007, according to Eurekahedge.

Fortress Investment Group LLC, the New York-based manager of buyout and hedge funds, started an Asia-focused macro fund in March that gained 0.4 percent through November, according to a filing with the Securities and Exchange Commission. The firm didn’t disclose the size of the Fortress Asia Macro Fund.

Artradis, which made $2.7 billion for investors as markets seesawed in 2007 and 2008, said in January last year it would close and return money to investors in its AB2 Fund and Barracuda Fund. Artradis managed about $800 million as of Dec. 31, 2010, compared with assets of almost $5 billion in 2008.

Traders who used to profit from price swings are struggling as record stock market volatility perseveres, making it more expensive to employ the strategy. Swings in the Chicago Board Options Exchange Volatility Index rose to a record in the second half of last year.

‘Poor Risk-Reward’

“Playing capital markets has been a poor risk-reward,” said Stephen Diggle, who set up Vulpes Investment Management after liquidating Artradis’s volatility funds. “There has been no obvious easy opportunity. Governments have intervened a lot everywhere.”

Singapore-based RSR Capital, set up by a group of derivatives traders from firms including Goldman Sachs Group Inc. and Barclays Capital, is returning most of outside investors’ money in its hedge fund as bets on volatility are “not profitable enough,” said Serge Handjian, one of the partners. RSR will continue to trade mainly the founding partners’ money as it shifts its investment strategy.

“The implied value of those options is so high that the expected returns are not enough to offset the price that you pay,” Handjian said.

RSR plans to open its Caerus Arbitrage Asia Fund to a small group of investors, said Handjian. The fund has been flat since it started trading in August 2010, and had assets of $62 million in May before client withdrawals, including a “decent amount” in July, ahead of the market’s collapse in August, he said.

‘Disappointing Performance’

K.H. Paik, the Singapore-based chief investment officer of CoreVest, decided to close down his fund at the end of last year and return money to investors after setting up the business 13 years ago, according to an e-mail to investors in December.

“Disappointing performance the last few years and market conditions that are not optimal for our strategy are the main reasons for the fund’s closure,” said the firm, which manages an Asian long-short equity fund focusing on Korea.

Boyer Allan Investment Management LLP told investors in December that it will liquidate most of its funds and shut the business set up by Jonathan Boyer and Nicholas Allan in 1998, said a person with knowledge of the matter.

Funds shut include the $235.9 million flagship Boyer Allan Pacific Fund, said the person who asked not to be identified because the information is private. The fund lost 19 percent in the first 11 months of 2011, according to data compiled by Bloomberg.

Kilometer, Pangu

The Pacific Fund returned more than 15 percent a year on average in its 13-year history, based on data in a May document distributed to potential investors. James Sweeney, Boyer Allan’s Hong Kong-based chief executive officer, declined to comment

Kilometre Capital founder Chris Hsu decided to return investors’ money in the fourth quarter because of health reasons, said a person with knowledge of the matter who declined to be identified as the information is private.

The Hong Kong-based hedge fund, which started trading in May 2010 with backing of Paloma Partners LLC and oversaw as much as $300 million, returned 47 percent in 2010 and lost 7 percent in the first five months of last year, said two people with knowledge of the matter. Steven Ho, Kilometre’s operations manager, declined to comment.

Partners’ Money

Pangu Capital shut down Pangu Opportunity Fund, whose assets peaked at $23 million, after 22 months, said a person with knowledge of the matter. Pangu decided to return all capital in the fourth quarter after its main investor asked to redeem a large portion of its money in October, having added capital in August, the person said. After September, the investor and the fund’s co-managers also differed on investment philosophies, the person said

The Greater China-focused fund generated positive returns in 2011 through August, said the person, who asked not to be identified because the information is private.

LionRock Capital Pte, run by a founding partner of TPG-Axon Capital Management LP, said in July it would stop seeking outside investors for its hedge fund that will focus on managing the partners’ money. The Singapore-based multistrategy fund had about $100 million of assets under management from $75 million of initial capital when founder Hari Kumar started it in 2009.

Nine Masts

“For smaller managers it’s simply a question that they cannot afford the opportunity cost of continuing,” said Paul Smith, chief executive officer of Hong Kong-based asset manager and hedge-fund distributor Triple A Partners Ltd. “I am pessimistic on asset raising. I can’t see that things will improve. There is too much global uncertainty which keeps investors on the sidelines.”

Still, Hong Kong-based Nine Masts Capital Ltd., set up by two former employees of Deutsche Bank AG’s Saba proprietary trading desk and an ex-DKR Oasis Management Co., was one smaller hedge fund that managed to grow assets during 2011.

Nine Masts stopped accepting new money in September after assets hit $500 million, almost five times the beginning of the year figure, said a person with knowledge of the matter. It is expected to post a high single-digit return for 2011, the person said, asking not to be identified as the information is private. Elaine Davis, Nine Masts’ chief operating officer, declined to comment.

“Both sizes of manager are finding asset raising in the current climate impossible unless their investment performance has been exceptional,” said Triple A’s Smith. “Business conditions have never been more inimical.”