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Hedge execs doubt shorting value in Asia

The high cost of shorting stocks and a bull run in Asian markets for much of this decade means many of the region's long/short equity hedge fund managers have delivered on only half their promise to investors.

Those putting money into some long/short funds might be better off in lower-cost traditional long-only fund managers, or other hedge fund strategies with a better prospect of delivering value, some industry executives told the Reuters Hedge Funds and Private Equity Summit in Hong Kong.

Already, alternative hedge fund strategies are gaining traction in Asia, where long/short equity fund managers have dominated the industry.

“I don't think that the majority of (Asian) hedge funds have performed properly and people are getting tired of paying for the performance fees and lack of risk management. On the other hand, they're seeing that some long-only managers can perform very well,” said George Long, chairman of multistrategy hedge fund manager LIM Advisors.

“What people are realizing is you can't hedge properly in Asia generally for your typical long/short equity fund. If you run the numbers it just doesn't work. So you might as well just accept the volatility and go long,” he said.

Long, whose firm manages about $825 million, said there are managers who are the exception to this. But he said the challenge for the industry is that Japan and Australia are generally the region's only markets where managers can effectively short.

Elsewhere, markets are often either too restrictive or expensive, he said, noting it can cost more than 10 percent per year to short a stock in India. 

Research firm and consultancy Eurekahedge said of the 1,040 Asia-focused hedge funds in its database at the end of March, about 57 percent used a long/short strategy, which is little changed from the end of 2005.

Yet it also said the amount of assets invested in the strategy fell to 60 percent at the end of last year from 68 percent at the end of 2005.

Just like traditional mutual funds, long/short equity hedge funds buy stocks they expect will gain in price. Unlike mutual funds, they are also free to borrow and sell short stocks they expect will fall in price, which could then profitably be bought back and returned to the lender.

When done correctly, the strategy allows managers to make money in both rising and falling markets. This can be rewarding for hedge fund managers, who typically charge a 20 percent performance fee on top of their management fee of 1 or 2 percent.

But analysts said too often managers fail to deliver on the short side. They point to the horrible performance of many small-cap Japanese long/short managers when the market sold off early last year, because few had properly hedged their portfolios with short positions.

Executives said the rise in Asian stock markets outside of Japan since the region's 1997-98 financial crisis means shorting has added little to the performance of even some of the region's best-run hedge funds.

“Although there can be months, or even quarters where the shorts that we put on do generate some positive contribution, if I look at it over the longer term …. it has been difficult to generate true alpha on the short side,” said Michael Nock, who heads hedge fund manager Doric Capital Corp. 

Alpha refers to returns above those in the underlying market.

“I'm not saying that we're looking at doing this at the moment, but if there were to be another product that someone like Doric might look at, it would probably be a long-only product.”

Nock, who has almost three decades of industry experience, noted some absolute return long-only funds still charge performance fees of 10 or 15 percent — and he believes top managers deserved such fees.

His flagship $277 million Doric Focus Fund had an annualized return of 19.8 percent from October 2001 to the end of February, one of the region's better long-term track records.

Many investors still believe Asian long/short funds offer good opportunities.

Julius Wang, a managing director with Vision Investment Management, said long/short managers are a prominent part of its $1.5 billion fund of hedge funds portfolio because the firm is able to find managers it likes.

He said other types of hedge fund managers the firm likes at the moment are convertible bond arbitrage, multistrategy, and event-driven equity strategies.

“The trick there is to get the diversification that one seeks when running a portfolio dedicated to Asia,” he said.

Source : Reuters

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