Hans Schlaikier, Hedgeweek

Hedge funds cross USD2.1 trillion in May… Difficult month for Asian funds …

Hedge funds ended May in positive territory with the Eurekahedge Hedge Fund Index up 1.15 per cent as global markets showed signs of stabilisation following a choppy start to the year. On a year-to-date basis, hedge funds are up 1.91 per cent while the MSCI World Index has returned 2.63 per cent in the first five months of 2014.

Global hedge funds crossed the USD2.1 trillion mark in May as fund managers delivered performance-based gains of USD9.29 billion during the month. Hedge funds recorded their fourth consecutive month of positive asset flows with net capital allocations of almost USD60 billion year-to-date.
 
Emerging markets focused hedge funds delivered strong gains in May, up 2.24 per cent with managers reporting strong gains from their exposure to India. Japanese hedge funds reported their first month of positive returns for 2014, up 0.80 per cent in May and have outperformed the benchmark Nikkei 225 index by 8.58 per cent year-to-date.

Fund managers using arbitrage strategies delivered their 11th consecutive month of positive returns, up 2.03 per cent on a year-to-date basis.
 
Eastern Europe and Russia focused managers surpassed all regional mandates in May; gaining 8.37 per cent as de-escalating tensions in the area stabilised regional markets.

Islamic funds were the best performing investment vehicle for the year, driven by strong gains in Arabian markets. Equities in the GCC countries have witnessed a strong rally in 2014, with the Eurekahedge Middle East/Africa Islamic Fund Index gaining 10.18 per cent as at May 2014 year-to-date.
 
In Asia, China’s encouraging PMI data coupled with an improving trade surplus and a resolve on part of the CCP to liberalise the mainland’s capital markets allayed fears of sharp slowdown in Asia Pacific’s largest economy. While in Japan, improving data on inflation following the sales tax hike, along with an optimistic outlook for the economy by the IMF added hope that an Abenomics driven recovery was still on track. Elsewhere in the world, markets welcomed the prospect of reduced tensions in Ukraine and the election of Modi at the helm of India’s economy as promising signs conducive to growth in the emerging economies.
 
All regional mandates ended the month in positive territory, with Eastern Europe and Russia focused hedge funds witnessing the strongest gains, up 8.37 per cent as an improving geopolitical outlook in Ukraine calmed market fears. The Eurekahedge Emerging Markets Hedge Fund Index was up a strong 2.24 per cent, with a number of India-focused managers employing systematic trading strategies posting strong gains from their exposure to the CNX-Nifty futures contracts. Managers investing with a Greater China mandate rebounded from their past two consecutive months of losses and were up 0.42 per cent, though they remain in negative territory year-to-date with losses of 3.68 per cent. European hedge funds were up 1.64 per cent as underlying markets trended upwards, despite the election of Euro-sceptics to the European Parliament with the DAX, CAC and FTSE 100 gaining 3.54 per cent, 0.72 per cent and 0.95 per cent respectively. The Eurekahedge Latin America Hedge Fund Index was up 1.27 per cent, with fund managers outperforming underlying markets as the MSCI Latin American Index3 declined 0.73 per cent during the month. Asian hedge fund managers were up 1.33 per cent with funds focused on Asia ex-Japan delivering gains of 1.94 per cent, while those focused on Japan were up 0.80 per cent. North American fund managers, lead the tables in terms of year-to-date returns (up 3.00 per cent), and gained 0.91 per cent during the month with event driven/activist fund managers realising the strongest gains.
 
Asian fund managers, with the exception of ASEAN-focused managers, generally had a difficult month in May with the narrow range-bound market, according to Singapore-based hedge funds specialist GFIA.
 
In its monthly Research Insight, GFIS said Dalton Asia which runs half of its book in China, underperformed the benchmark as its gaming-related names in Hong Kong saw a sell-off on fears of slowing growth in Macau.
 
Sell-offs in technology and gaming stocks driven by deleveraging investors were the primary reason for the negative performance across Flowering Tree Ashoka Fund (-1.4 per cent)’s key markets. MMA Asia were caught wrong footed in their short positions in Taiwanese technology stocks which, despite their unattractive high valuations, continued to climb upwards. JP Morgan Absolute Return Fund lost 1 per cent due to their Macau and Property positions in China and Banks and Auto positions in Korea.
 
According to GFIA, Ellis Munro’s portfolio was hit hard by the sell-off in three of their positions due to factory worker strikes in China, competitor pricing in Australia & Indonesia and changes in European oil product flows. Long biased managers like One North (1.1 per cent) continued to navigate smoothly through this range-bound market. The fund initiated three new positions and is now 70 per cent invested in 27 stocks.
 
The report further stated, "Macro and multi-strategy funds also had a sluggish month as investor conviction and positioning levels remained low, leading to a trendless month. The lack of a discernible trend in Asian markets was reflected in the performance of Rohatyn Group Asia Opportunity Fund which saw its small gains in equity and interest rates books offset by losses in the currency book. Counterpoint Asian Macro got hurt on their long Nikkei position, which plunged, partly triggered by disappointment over inaction by the Bank of Japan in its 8th April meeting. BFAM Asian Opportunities also retreated 0.6 per cent as its equity-linked and volatility portfolios struggled due to persistent valuation pressure in the convertible bonds universe and decreasing volatilities on Asian indices."

GFIA said the Asia credit market, as measured by JACI Composite Total Return Index, posted a positive return of 0.75 per cent in April primarily due to carry as well as depressed US Treasury yields and flatter U.S. Treasury curve. Carry was the main contribution to most credit fund managers’ performance. IP All Seasons Asian Credit Fund saw its net exposure increase to 96.4 per cent (compared with 76.2 per cent in March) as the portfolio manager increased bond investment exposures and unwound the CDS short position on South Africa.

Adding alpha through carry trades with focus on short dated high yields bonds was also going to be the main strategy for Bluewaterz Total Return Bond Fund. The fund manager expected broad USD strength to continue and preferred relative value trades among Asian currencies, such as long Korean Won (KRW) against Singapore Dollar (SGD) and Thai Baht (THB). TCM Asia Opportunities Fund declined 0.8 per cent as the differentiation of fundamentals and performance widened in some of the sectors that they had exposure to.
 
Asian event space is showing signs of sustained momentum as deal volume recorded the highest monthly number since July 2012. Funds’ performance generally tracked the index this month. Pengana Asia Special Events Fund’s underlying index futures have proven to be less effective in the last two months as the "flight to quality" resulted in a beta mismatch between index constituents and non-index members.
 
India’s stock market regulator accuses Hong Kong-based Factorial Capital Management of insider trading, saying it suspects the hedge fund had shorted L&T Finance Holdings before the announcement of a share sale in the company in mid-March.
 
The Securities Exchange Board of India on Thursday also reserved the option of looking into Credit Suisse’s Indian unit, which had been the broker for L&T Finance’s share sale, but did not accuse the investment bank of any wrongdoing or announce the start of an actual investigation.
 
The accusation against pan-Asia multi-asset hedge fund Factorial comes after an unusually quick investigation by an Indian regulator long regarded as too timid to go after potential insider-trading violations.
 
The claims involving Factorial come as Sebi chairman UK Sinha steps up the fight against securities fraud in a country where many believe insider trading and share manipulation are rampant.
 
Sebi said Factorial would have 21 days from the date of its order to file a reply and request a personal hearing with the regulator.
 
In a statement to Reuters, Factorial said the allegations were “without merit” and said it would co-operate fully with the investigation.
 
A Credit Suisse spokeswoman in Hong Kong declined comment.
 
In a seven-page document, Sebi said it had established that Credit Suisse approached Factorial, along with more than 70 institutional investors, not identified, about their interest in a potential share sale of L&T Finance by majority owner Larsen & Toubro, India’s biggest engineering company.
 
Sebi said Factorial’s transaction on March 13 had netted the hedge fund a profit of around Rs200m, and said it found the transaction “aberrant and suspicious”.
 
The regulator said the fund’s massive short positions in L&T Finance’s derivatives ahead of the discounted share sale led to suspicion about its access to information on the discounted share sale.
 
Guard Capital Management, a hedge fund start-up by two top traders formerly with Goldman Sachs and Noble Group, is aiming to launch next month and has hired at least four executives, one person with knowledge of the matter said to Reuters.
 
The hedge fund is being led by Leland Lim, who was the co-head of macro trading for Asia Pacific ex-Japan at Goldman Sachs Group Inc, and Allan Bedwick, the former head of macro trading in Asia for Noble Group.
 
The launch comes as the first signs of recover in the industry surfaces after six tough years for capital raising. Asia-focused hedge funds added USD20 billion in 2013, their first asset growth in three years, according to data from AsiaHedge.
 
The Hong Kong-based macro hedge fund has hired Matthew Edwards from Grosvenor Capital Management as head of business development, while Freda Chan, the former chief operating officer of fund of hedge funds Vision Investment, has joined as the head of operations, the person said.
 
Bin Gao, a former BofA Merrill Lynch rates strategist, has joined as head of strategy. Sean Giefing, who worked at Nomura Holdings in London as well as hedge fund BlueCrest, will head the trading team, the person added.
 
The start-up capital of the fund was not immediately clear, the person said, declining to be named as the matter remained confidential.
 
Guard spokesman Matthew Edwards declined to comment on the matter when asked by Reuters. The hedge fund is waiting for a license in Hong Kong to start operating. 

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