The Rise of Multi-Strategy Hedge Funds in Asia

Introduction

Asia hasn’t historically been the most obvious emerging market for non-Asian hedge fund managers to focus on. In fact, most investors are sceptical of investing in Asia due to China’s influence over the markets, subjecting the investments to a high level of unpredictability and illiquidity. Historically, growth and value investors in Asian equity markets have done well with high-growth stocks, especially in the TMT sector. However, the bullish equity market may now be a story of the past. With growth slumping, coupled with continued uncertainty over China and US relations, equity l/s no longer serves as the strategy that yields the highest risk-adjusted returns for investors. On the other hand, this presents an interesting case for multi-strategy funds that have quietly increased their presence in the region.

In recent years, the industry has observed a fair share of ‘well-pedigreed’ multi-strategy managers establish their presence in Asia, and overall, funds focusing on Asia surged to an average of 13% and 6.2% in 2022 and Q1 2023, respectively. This was partially fueled by the region’s low-tax schemes but was also caused by the growing dispersion and volatility in Asia, grabbing the attention of several managers seeking to exploit the market conditions. Additionally, there were several key macro themes that arose post-pandemic, such as China’s reopening, subsequent consumption trends, as well as the boom in the SHFE metals market due to the global push for renewable energy, which provided the ideal setting for scaling bets in currency, fixed income, and commodities. Though l/s equity still dominates nearly half of the hedge fund market in Asia, we have noticed that there was soaring demand for talent throughout 2022 and 2023 in macro and fixed income strategies that are well-positioned to take advantage of the dynamic market environment. Across Singapore and Hong Kong, several key hires in macro and fixed income relative value strategies have been made by blue-chip businesses like Balyasny, ExodusPoint, Millennium, Point72 and Schonfeld, signalling the increasingly high priority in hiring talent for Asia macro and Asian FI RV strategy.

Taken together, these market developments set the stage for understanding how global multi-strategy hedge funds have begun to take structural and competitive leadership in the region.

Global Multi-Strategy vs. Local Funds

Before delving deeper into specific strategies, it is important to highlight the difference between Asian local funds vs. global multi-strategy platforms, and why the latter may likely emerge as the winner in Asia’s hedge fund industry. The hedge fund landscape in Asia can be split roughly into two categories – regional satellite offices of global multi-strategy platforms and the smaller Asia-native hedge funds, established by local managers in the form of single-manager shops or family offices. The most well-known managers in that category include Asia Genesis, BFAM, Crescent, Complus, Dymon Asia, and Polymer, whilst the former includes ‘household brands’ such as Millennium, BlueCrest, Balyasny and Point72.

However, even within these two wider categories, we can find important differences. Among multi-strategy platforms, there are those who only recently turned their attention to Asia and those who already had a significant focus on Asia, mostly via Japan, since inception, such as Alphadyne and Capula. Similarly, amongst the smaller Asian hedge fund managers, some are successful spin-off funds from the established multi-strategy platforms, such as Astignes (from Alphadyne), Southern Ridges (from Bluecrest), and Symmetry (from Millennium). Symmetry has, in turn also had a successful spin-off from their own platform, when Peng Zhang launched Fixed Income RV-focused Welwing Capital in 2020.

For others with roots in Asia, they are seeded and managed by local investors, without the backing of quality first-generation multi-strategy managers, and they often suffer from a limited scope of expansion due to challenges associated with asset raising. According to Asiahedge, approximately the 5 largest funds in the region, all being satellite offices of global players, control nearly 40% of the total assets. The best explanation for this is the new “pass-through” cost model that global multi-managers implement.

This landscape demonstrates a clear structural divide: global platforms have scale, flexibility, and support systems that many local managers struggle to match, especially in periods of volatility or rapid dispersion.

Cost Pass Through

Before the emergence of multi-billion-dollar multi-strategy platforms like Citadel and Millennium, the industry’s management and performance fees were traditionally capped at around 2% and 20% respectively, constraining their ability to offer outrageous compensation packages that have now become more prevalent. Pass-through structure, on the other hand, “passes through” expenses to the investors, which can involve anything from higher eight-figure compensation to superfluous wellness packages to lure top talents. Several local hedge fund managers have already lost their star traders to these offers from global giants; Takehiko Sari and Raymond Choi, former Senior Portfolio Managers at Dymon Asia, were uprooted by Millennium, while Southern Ridges lost one of their top macro traders, Charles Chung, to Balyasny. By “hoarding” these profitable portfolio managers, these larger pass-through funds raked in notably higher returns – according to Barclays, funds with pass-through returned an average of 10% while those without returned around 6%.

This subsequently draws more investors to these multi-managers, consolidating the “trend of rich getting richer”. Though some local hedge funds have managed to secure a ‘decent’ amount of capital, which ranges from $1bn - $15bn, funds like these are few and far between, and much of the Asia hedge fund industry has a long tail of funds with AUM under $1bn. Among Asia native funds, Dymon Asia has seen relative success as a multi-strategy platform, with their AUM growing to $5.7bn, managed by circa 40 trading teams. However, the issue that is leading to a fundamental divide between Asia native and foreign multi-strategy hedge funds building an Asia presence remains due to the difference in the risk and scale appetite each type of business has.

Asset Allocation & Risk Appetite

With more capital inflow from investors, large global multi-managers can be more aggressive in asset allocations and risk. Generally, the global platforms building out in Asia follow similar metrics to their other geographies when hiring in the region: standard allocations for individual risk takers tend to start at circa $200mn and can grow rapidly to twice or three times that capital base within a year if performance ($10mn+ annual return) and strategy warrant it. In the local funds, capital is often centrally controlled and managed by the CIO or a handful of trusted senior PMs close to the CIO, while the new PMs are drip-fed capital and risk tolerance, even when their performance more than justifies an increase in both. This disparity is illustrated by a side-by-side comparison of a macro-PM at an Asia local manager and another macro-PM at global multi-strategy shop. Over the course of 3 years, both macro managers consistently returned circa $12mn+, yet the portfolio manager trading from local platform had a notable lack of growth in AUM compared to that of PM from global multi-strategy shop, despite the almost 1:1 ratio of return in $ PnL. Hence, this triggers the current cycle we are seeing, where smaller Asia funds fail to retain exceptional talent within their platform and resulting in them posting dwindling returns compared to their global rivals.

This has prompted funds to emulate these cost-structures of multi-managers, and among them were Southern Ridges, Dymon Asia and most recently, Nine Masts and PinPoint Asset Management.

Capacity to Diversity

Finally, most smaller hedge fund managers in Asia tend to exploit opportunities in niche markets and/or is focused on a single strategy where capacity constraints often stem growth. The most common strategy in the region continues to be Asian equity l/s. In 2021 and 2022, as Asian markets experienced unexpected volatility due to the combined effects of the pandemic and China’s clampdown, funds with a country-specific focus, especially those with higher stakes in Greater China, posted double-digit losses. This mostly impacted funds that were concentrated on investing in growth stocks such as Sylebra Capital, which posted a 35% loss, but also the likes of BFAM, a Greater China investment-focused multi-strategy, that suffered from its wide-ranging positions linked to China real-estate, eventually ending 2021 with -11%. In the same year, those who focused elsewhere on Asia and employed multiple investment strategies fared considerably better. The winners include Seth Fischer’s Oasis Management, who had a 16% surge by diversifying to Japan from their previous greater China-focused strategies; Quantedge, a quantitative macro fund, who posted a 20% return from its global cross-asset investments and lastly Polymer Capital, a multistrategy fund led by Angus Wai, (a former portfolio manager at Point72), who was inspired from his previous employer in terms of structure and diversification strategy, returning 11%.

This underscores the importance of diversification – whether in geographic focus or in strategies. Overall, the managers who deployed multiple investment strategies in different geographies with balanced bullish and bearish wagers in collaboration with tighter risk limits triumphed over 2021’s turbulence. All of which are attributes more common in global multi-strategy, multi-manager platforms rather than traditional single strategy/CIO-focused managers.

In combination, these factors explain why global multi-strategy platforms have been steadily consolidating their position as the dominant force in Asia’s hedge fund ecosystem.