Hedge funds bucked the trend of decreasing investments in emerging markets, with new hedge funds springing up and existing ones raising more capital. However, it was not an easy year. "It was a year where focused risk management disciplines were most needed," said Steve Howell, cio at Basis Capital a Sydney-based hedge fund. "Those who are simply long-biased managers, in say equities, suffered from the turmoil of market dislocations."
"A slower America meant dampened world consumption patterns," according to Howell, who added "[Sept. 11] happened at a time when the markets where most in need of some good news." "Instead what was delivered was a catastrophe of the highest magnitude, at that time liquidity, or lack thereof, was a significant event in itself."
On the back of the growth of hedge funds in the region ING Barings launched a prime brokerage desk in Hong Kong early in the year (DW, 1/29). In Japan, UBS Warburg also looked to expand its presence marketing to the hedge fund community by bulking up its sales team (DW, 11/26). Nick Garling, head of hedge fund sales at UBS, reflected on the alternative investment market in Japan: "Due to the fall in the stock indices in Japan, the convertible bond arbitrage market dried up, prompting growth in event-driven funds and an increase in quantitative strategies." This process started with the Nikkei 225 rebalancing in 2000/01. "Every rebalance since has been heavily watched by hedge funds," added Garling. Such reweighting includes the MSCI Japan index, for which funds piled into the cash and equity derivative market (DW, 10/29).
As for the convertible bond market in Australia, where it employs arbitrage strategies, Howell noted hallmark investment grade issues in the year, such as Coles Myer and AMCOR. Back in June, the fund bought credit default protection on AMCOR to hedge credit exposure on its long position on the company's convertible bond (DW, 6/25). In another convertible strategy Basis employed, it looked to strip the option out of Chartered Semiconductor Manufacturing's convertible, through an asset swap, leaving only exposure to the equity component (DW, 11/5).
The boom in the number of hedge funds and their sophistication led to an increase in derivatives players. Funds looking to use credit derivatives for the first time include, Macquarie Investment Management (DW, 6/2), BT Funds Management (DW, 11/12), Commonwealth Investment Management (DW, 7/23) and UOB Asset Management (DW, 10/14). Hong-Kong based Axa Investment Managers launched funds, which will handle equity derivatives (DW, 6/4), as well did Zenith Asset Management (DW, 11/5).