Asia start-ups turning to fixed income strategies, SinoPac to launch fund administration unit in Hong Kong…
On the back of the HSI Volatility Index (VHSI), which measures Hang Seng Index (VNKY) option prices, reaching a six-year low earlier in October, Asian hedge funds are positioning themselves to bet on a return of volatile asset prices reported Bloomberg News this week.
Andrew Wong, a former Artradis Fund Management Pte manager, and who founded Fortress Convex in May with David Dredge as part of New York-based Fortress Investment Group LLC, was quoted as saying: “The last time we heard people say that in a low volatility environment that volatility was never going to rebound was in late 2006, just before the recent financial crisis. When people begin to be concerned that it might be permanent, it’s typically not too long before the regime shifts into something dramatically different.”
The HSI Volatility Index has risen 12 per cent to 16.67 after reaching its lowest level since 2006 on 19 October. In the US, the VIX also rose 4.4 per cent to 17.81 last week.
Volatility arbitrage strategies are a highly complex trading strategy. Their toolkit is the “Greeks”, a series of mathematical parameters that measure different aspects of underlying options contracts such as time decay (“theta”), and sensitivity to changes in price volatility (“vega”). Funds will typically go long volatility if they expect price volatility to increase. In benign markets, however, it can prove a costly exercise. Sharp Peak Vega Feeder Fund, for example, lost 12 per cent in the first half of 2012 and 18 per cent since it launched in October 2011. The Hong Kong-based manager has since shuttered the fund.
Danny Yong’s Dymon Asia Capital is moving into the private equity space and is preparing to launch a fund with the support from a unit of Singapore state investor Temasek Holdings reported Reuters this week. The hedge fund company plans to raise SGD300million for Dymon Asia Private Equity (DAPE), Keith Tan, Dymon’s managing partner, told clients in an email. It is believed that the new fund is receiving SGD100million from Heliconia Capital Management Pte, a subsidiary of Temasek. Companies with revenues of between SGD25million and SGD500million will be targeted. The expected launch date is not yet known.
Taiwan’s SinoPac plans to set up a fund administration division in Hong Kong to target smaller hedge funds and private equity funds reported the Taipei Times this week. This comes on the back of recent news that HSBC Holdings Plc, which administers USD150billion in hedge fund assets, has decided to terminate agreements with some of its smaller Asian hedge fund clients. SinoPac plans to start supporting clients from December following regulatory approval. Steve Bernstein, a former Citigroup Inc executive, will lead the business.
A universe of 1,000 hedge funds, private equity funds, as well as family offices and wealth management companies in Asia Pacific running less than USD100million will be targeted according to Bernstein. “About 85 per cent of the funds out there have below USD100million of assets under management. The bigger funds all have great services. The small funds either have to go to multiple providers for different services or they are getting charged a lot,” Bernstein was quoted as saying.
It is believed that the new division will be named SinoPac Solutions+Services Ltd. It may also bring smaller funds under SinoPac’s wealth management wing, to help managers with their capital raising requirements. The aim is to onboard one client a month, with Bernstein confirming that two new Asian hedge funds have expressed an interest in becoming clients in Q1 2013.
Finally, Asia’s record level of bond issuance is attracting the launch of more fixed income-focused strategies among the region’s start-up manager community wrote a Wall Street Journal blog this week. If so, it might be heralding a structural shift in Asia’s hedge fund industry, which has for so long been dominated by long/short equity strategies.
David Murphy, head of prime finance for the Asia-Pacific region at Citigroup Inc, was quoted as saying that the relative importance of equities “has diminished a little”. He said the shift was coming because investors need to diversify their investments with primary issuance of debt proving more robust relative to equity issuance. Apparently equity-market volumes are down roughly 30 per cent in Asia.
The trend was confirmed by Ben Williams, Asia-Pacific head of financing sales at bank of America Merrill Lynch, who noted that there had been an uptick in both the number of credit-focused funds and the amount of assets being allocated to such strategies in Asia this year. One such fund that launched this year is Asia Research & Capital Management Ltd, run by former employees of Perry Capital LLC’s Asia operations. The fund has attracted more than USD900million from investors, making it one of the region’s few success stories in 2012.
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