Some time ago, we discussed the role of market inefficiencies - particularly geographically localized market inefficiencies - in alpha-generation. As institutional investors are well aware, it’s extremely difficult to get an “edge” in highly-liquid capital markets such as that of US large cap securities.
Thus, the prototypical example of a portable alpha strategy is to go long a manager operating in a less efficient market such as emerging markets manager, simultaneously short that manager’s underlying (beta) benchmark, and use the proceeds to go long the S&P 500. This way, the resulting exposure would likely satisfy any mandate to remain exposed primarily to US large cap securities, while the opportunity for upside (or downside) existed via the emerging markets manager.
A few days ago, Alpha Magazine released the latest in its series of hedge fund rankings (available here). This one is a ranking of the 25 largest Asian hedge fund managers. Executive Editor, Michael Peltz tells us this ranking is unique because it covers Asian hedge funds, not just global hedge funds that invest in Asian capital markets (as most do).
According to Alpha, the top 5 Asian hedge funds are:
Sparx Group, US$6.6b AUM Long/Short & Credit Value Partners, US$4.7b AUM Long-bias Equity Arisaig Partners, US$2.1b AUM Activist Penta Investment Advisers, US$1.9b AUM, Long/Short Ward Ferry Management, US 1.8b AUM, Long/Short
Richard Fan, founder of Singapore-based UG Investment Advisers tells Alpha that “for opaque, illiquid, and under-developed markets like China’s, there is no substitute for local knowledge” and goes on to say that local hedge funds have a huge advantage over foreign competitors. Overall, Asian hedge fund managers now manage over US$35 billion, up over 50% since last year.
That’s impressive growth, but not really that many assets compared the overall size of Asian capital markets. This is partly due to the fact that Asian regulators aren’t big fans of short-selling. (As Alpha points out, short-selling is forbidden in China…apparently it’s as “un-Chinese” as some have suggested it’s “un-American”).
If short-selling makes markets more efficient, then by definition, Asian markets are relatively less efficient - making them a great place for a hedge fund.
With the recent opening of Asian offices by US and European managers (e.g. Tudor, RMF), we wonder how long it will be before these Asian managers get caught up in the global hedge fund M&A scramble.