Hedge funds to draw interest as industry weathers storm: Credit Suisse

by Tomoko Yamazaki and Komaki Ito


Japan’s hedge-fund industry, dominated by so-called long-short funds that bet on rising and falling stock prices, will attract capital on signs they are starting to outperform their peers, Credit Suisse Group AG said.

The 81-fund Eurekahedge Japan Long-Short Equities Index fell 11 percent this year through October, compared with a 21 percent drop for an index that tracks more than 1,000 global long-short hedge funds and a 40 percent slide by the MSCI World Index, a global benchmark.

“Japanese long-short strategies have weathered reasonably well the market turmoil,” Boris Arabadjiev, head of alpha strategies at Zurich-based Credit Suisse’s asset management unit, said in an interview Friday in Tokyo. “That relative performance has already started to attract capital, and we believe that it will continue to attract capital. We continue to be favorably disposed to managers investing in Japan.”

This year has been the worst on record for hedge funds, an estimated $1.56 trillion industry, with the average fund losing 16 percent through October, according to data compiled by Chicago-based Hedge Fund Research Inc. The industry saw net withdrawals of $62.7 billion in October, according to Eurekahedge, a Singapore-based industry data provider.

The industry may face further redemptions of 25 percent to 30 percent in the next six months, said Arabadjiev, 40.

Japanese hedge funds with smaller assets, and those with year-to-date positive returns, controlled volatility and track records of three to six years, are attracting capital, he said, declining to name funds he has visited in Japan.

The Eurekahedge Japan Hedge Fund Index was the best performer by region in October, declining 2.8 percent, as trades that involved selling regional stocks while taking advantage of currency moves helped stem losses.

The decline compared with a 20 percent drop by the Topix and a 4.4 percent loss by Eurekahedge’s global hedge fund index.

“October was an amazing endorsement of the hedge-fund industry’s ability to protect investors’ capital,” said Peter Douglas, principal of Singapore-based hedge-fund consulting firm GFIA. “While nobody can be proud of losing clients’ money, the experience of this year will, with hindsight, establish the hedge-fund industry as the undisputed risk managers of the asset management industry. I’m proud to be a part of it.”

There were 237 hedge funds investing exclusively in Japan, with about $18.4 billion in combined assets, as of October, according to Eurekahedge. That compares with almost 150 funds managing about $11 billion in October 2003, according to the data provider.

Arabadjiev said Credit Suisse has invested in Japanese hedge funds for close to a decade through its flagship fund, Sapic, which is a fund of hedge funds. The $1 billion fund invests global hedge funds with strategies ranging from global macro to long-short equities, and has had a net annualized return of 7 percent since its 1998 inception, he said.

“The overall size of the market, the fact that the industry here on a relative basis is a bit more developed, is attractive,” Arabadjiev said. “It’s a space that has been somewhat neglected, but it’s a space that this year has shown stable returns.”

Credit Suisse’s alternative investments group, which oversees hedge funds, private equity, real estate and credit, manages about $160 billion, he said.

The hedge fund group is headed by Steve Smith in London and is divided into three sections — beta strategies, single-manager portfolios and alpha strategies. The alpha division, which Arabadjiev heads, manages a fund of hedge funds and customized mandates and has about $22 billion in managed assets.

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