Jobless bankers may lift Asian hedge fund numbers

The number of Asian hedge funds could increase by 10 percent this year as more unemployed bankers and traders launch new funds and the cost of doing business slumps.

It's much better to be a small hedge fund manager than an unemployed investment banker. We are beginning to see quite a strong wave of managers' formation, which is entirely consistent with what we saw after the Asian crisis.

It’s expected that these bankers could add to around 700 hedge funds already based in Asia, as battered global banks shed staff who have strong relationships with potential investors, cash from bonuses, and friends to start off small funds.

Assets under management in Asia could remain little changed, from an industry estimate of $100-$150 billion last year.

The Asian hedge fund industry saw huge redemptions last year as only a quarter of 1,150 Asia-focused hedge funds made money in 2008 compared with around 40 percent of global hedge funds.

Chicago-based Hedge Fund Research said its HFRI Emerging Markets Asia ex-Japan Index dropped 33.5 percent last year, reflecting the poor performance of funds in Asia, underperforming the 19 percent drop in its main global HFRI fund weighted composite index.
But the problem is that some of the Asian hedge funds had become so large that it made it difficult for them to take advantage of limited opportunities to short stocks in Asia.

If you are running a long/short fund right now, $100 million or $200 million, your shorting universe is fairly healthy. It's been quite difficult to allocate to long/short equity in Asia because managers who you want to allocate too are typically running too much money.

Long/short strategy was among the worst-performing strategy in hedge funds globally last year, losing more than a quarter on average, according to data from Lipper, a unit of Thomson Reuters.

Hedge fund legal construct outlook

Hedge funds are a legal construct rather than an asset class now. Part of the construct involves investment agreements that are often absurdly on-sided. After last year’s lousy performance and record levels of hedge fund closures, and with the balance of supply and demand tilted in investors’ favor for the first time in years, even some star managers are now on the back foot. It’s time for investors to push for their rights.

Fees are central to this conflict. But the issue goes beyond that to more qualitative areas.

A fund’s outside investors are in fact usually more limited than general partners. A hedge fund manager can have dictatorial powers to change his investment style at will; to appoint the directors who nominally oversee his fund; to create unruly investments in “side-pockets” where they can be left indefinitely to mature or die and to decline investors’ redemption requests in full or part.

Blocking withdrawals has most annoyed investors lately. Many wanted to pull money out as the hellish 2008 ground to a close, because they either needed it elsewhere or wanted to stash it somewhere less risky. But plenty of managers blocked withdrawals, claiming this was best for their fund investors overall. Many investors instead saw at least some instances of this as the managers acting in their own interest.

Usually limited partners, i.e. investors have at least two options in response. One is to pull their cash, as soon as they are able. The other is to insist that new funds – and maybe even old ones – take a fresh approach to the relationship between fund managers and investors.

That’s not to say full-on democracy is the order of the day. Hedge funds are mostly still private partnerships involving wealthy and sophisticated investors, who hand over money because they trust specific fund managers’ judgment. But investors could, for example, insist on a vote on critical actions like gating. Or they might propose requirements for more obviously independent governing boards for funds.

The typical fund general partners might see such moves as too much of a change from standard operating procedure. But it would be harder to argue against it. If those changes started happening, though, it would be a signal that investors had taken the initiative and started to redesign the hedge fund legal construct to suit their interests better.

ECB Under Pressure to Follow Fed

The US Fed is increasing its balance sheet by another $1 trillion, including $300 of Treasury bonds.

The Euro against USD appreciated after the Fed’s move in more aggressive MBS and Treasury purchase, it put Europe in a disadvantage situation as strong Euro may hurt this export-oriented economy.

The ECB is hemmed in by European Union rules that forbid it from buying bonds directly from governments and any decision to buy debt in the open market may spark a dispute over which country’s securities to purchase. So it is very unlikely that next week the ECB will follow the Fed in deploying traditional quantitative easing measures. Instead ECB may probably cut its main rate, buying more time to figure out how to implement quantitative easing in the more complex euro-zone setup.

As the exchange for Euro against USD can be expected to decline after this possible move by ECB, the resurgent inflation may strike sooner than expected. An over-inflationary monetary or fiscal policy could quickly produce accelerating inflation even while recession persists. And it will cause a big headache for ECB if it really happens.

Hedge fund disappeared 15%

Hedge-fund liquidations rose to an all-time high last year, with about 15 percent of the industry’s offerings disappearing as managers posted record losses, according to Hedge Fund Research Inc.

About 1,471 funds shut down, the closures exceeded by 70 percent the previous record of 848 set in 2005. In the fourth quarter, about 778 funds closed as investors withdrew $150 billion. Those funds that will be around this year are the ones with the right skill set.

Hedge funds lost an average 19 percent last year, the industry’s worst returns since Hedge Fund Research started tracking data in 1990. Client assets fell by 37 percent from the peak in June to $1.2 trillion amid the biggest losses in equity markets since the Great Depression, according to Morgan Stanley.

Among the firms shutting funds were Drake Management LLC, a firm started by former executives from BlackRock Inc.; Peloton Partners LLP, the London-based firm run by former Goldman Sachs Group Inc. partners; and Ospraie Management LLC, run by Dwight Anderson in New York.

The closings represented about 15 percent of 9,284 funds in the industry. The total included more than 275 funds of hedge funds, which allocate money to managers on behalf of clients, shut down.

On the other hand, there were only about 659 openings last year, the lowest since 2000, when 328 funds were set up, the research company said. Fifty-six funds were started in the fourth quarter, compared with 117 in the previous quarter.

Asian bond market?

With stock markets down and banks not lending, Asian countries need to develop domestic corporate bond markets. That requires macroeconomic and tax policies that encourage bond investment, transparent price discovery and an investment culture oriented toward the long term. Structured properly, such markets could direct the region’s ample savings to where it is desperately needed.

The rationale behind this proposal lays in two aspects: firstly, Asian corporate need financing in the current credit-tight world, secondly, a place is needed for the large savings in Asian to invest.
Over the past decade, Asian corporate growth has been financed primarily from two sources: bank loans and equity issues. But the region’s stock market declines and banks’ reluctance to lend have revealed that few countries have adequate domestic corporate bond markets to take up the slack. In fact, so far in 2009, only three Asian corporate bond issues, totaling less than $1bn, have been sold outside Japan, Australia and New Zealand.

As Asian economies grow, increasing numbers of companies are large enough to float bond offerings that offer adequate liquidity. But it’s believed that the government should play an important role to develop an active bond market. The tax advantages for capital gains, which favor shares over bonds, should be adjusted. Inflation is also a big issue for government.

For Asian people, the most important need will be for investor education. During the boom, emerging stock markets appeared to be an endless source of casino-like profits. Now investors have learned that gambling also bring losses. They must be shown that a balanced investment portfolio includes both stocks and bonds, with the objective of moderate stable returns over a lengthy period.

The demand for Asian corporate bonds is potentially considerable since Asian countries mostly have high saving rates. It applies especially to China.

Bernanke Says Insurer AIG Operated Like a Hedge Fund

Federal Reserve Chairman Ben S. Bernanke said American International Group Inc. operated like a hedge fund and having to rescue the insurer made him “more angry” than any other episode during the financial crisis.

According to Bloomberg, Bernanke told lawmakers today: “If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG. AIG exploited a huge gap in the regulatory system, there was no oversight of the financial- products division, this was a hedge fund basically that was attached to a large and stable insurance company.”

Bernanke’s comments foreshadow tougher oversight of systemically important financial firms, and come as President Barack Obama seeks legislative proposals within weeks for a regulatory overhaul. The U.S. government has had to deepen its commitment to prevent AIG’s collapse three times since September as the company accumulated the worst losses of any U.S. company.

Bernanke blamed the company “made huge numbers of irresponsible bets, took huge losses, there was no regulatory oversight because there was a gap in the system. At the same time, officials had no choice but to try and stabilize the system by aiding the firm.

It’s believed that banks relied on AIG’s financial products unit to back about $298 billion of assets through derivative contracts at year-end, making the firm a “systemically significant failing institution” that has to be propped up.

AIG has reduced the number of bets made by the financial products unit that sold credit-default swaps by more than 25 percent since October and cut expenses by “ hundreds of millions” of dollars. But that’s not enough.

Critics including former AIG Chief Executive Officer Maurice “Hank” Greenberg said the strategy of breaking apart the insurer and selling units wouldn’t reap enough to repay AIG loans.

AIG is getting as much as $30 billion in new government capital and relaxed terms on its bailout announced yesterday. The insurer’s first bailout package grew to $150 billion last year. After failing to sell enough subsidiaries to repay the government, the company had to turn to the government again. The company may need more support if financial markets don’t improve.

AIG’s fourth-quarter loss widened to $61.7 billion, the New York-based insurer said yesterday. The results brought its annual loss to almost $100 billion, prompting the U.S. to offer a package of equity, new credit and lower interest rates on existing loans designed to keep it in business and prevent a new shock to the world’s financial system.

The first rescue of the insurer came in September the day after officials couldn’t find a buyer for Lehman Brothers Holdings Inc., leaving the investment bank to file for bankruptcy. AIG also marked a turning point in the relationship between the U.S. Treasury and the Fed, with the central bank pushing then Treasury Secretary Henry Paulson to seek cash from Congress for additional bailouts.

Whether we like it or not, America’s federal policy is now driven by the need to avoid another Lehman.