Research

On September 1st this year, we launched our second fund, the KGR Capital Asian Dynamic Absolute Return Fund. It differs from our original fund, the KGR Asia Pacific Absolute Return Fund, in that its target return is higher (15-20%) as is the expected annualised volatility (7-10%). Accordingly, it will focus on hedge funds and hedge strategies in the region with slightly higher target returns than those in Asia Pacific Absolute Return Fund. We are also planning to launch a London-listed investment company, KGR Capital Absolute Return PCC, with Dresdner Kleinwort Wasserstein Securities acting as sponsor and distributor. We anticipate this new issue being launched and listed during the 4th quarter.

We have been urged to do this by our investors (as well as those UK investors who have been unable to invest in our offshore funds) for some time.

It is an ideal vehicle for UK private wealth managers and others with UK tax liabilities to consider because it is much more tax efficient. Gains are taxed as capital rather than as income which is the case for nearly all offshore hedge funds and funds of hedge funds. Also, the fund offers price transparency with market makers providing daily liquidity. Several global funds of funds have already raised money from UK investors in this way. We are absolutely delighted to be pioneers in this field.

Recent developments in the UK investment trust market have addressed this issue and, I think, have ensured that investors need not be too concerned about this. In common with other companies, we would propose that the new company would have the power to redeem up to 25% of the outstanding shares in issue at the directors' discretion every six months from 30 June 2007 onwards. In addition, the board would have the power to buy in the market up to 14.99% of the shares in issue in the period up to the annual general meeting. It is expected that this authority will be sought annually and actively employed. Frankly, if one looks at the funds of funds already listed in London, a bigger problem is that many of them trade at a premium. That's great if you bought at new issue but not so good if you are considering investing in the secondary market. In order to combat excessive premia, the board will have wide powers to issue new stock. Hopefully, this will give market makers the comfort to make a price near to net asset value.

Our total assets under management including advisory accounts amount to about US$160 million of which just over US$80 million is in the Asia Pacific Absolute Return Fund. This time last year, our total assets were US$58 million. Since launch just over two years ago, the fund has given initial investors an estimated USD annualised return of 10.22% per annum until the end of September, with a volatility of 4.03%. 20 out of 26 months have been positive in terms of performance.

We currently have 32 funds in our flagship fund. 25 of the 32 key trigger pullers are based in Asia.

Having become comfortable with our ability to select talented hedge fund managers in the region, several early stage investors asked us to consider launching such a product as they wanted to commit assets to a fund with a slightly higher risk measure targeting enhanced returns. As our investment team covers nearly all hedge funds in the region, the creation of this second portfolio has not been particularly onerous since we have not had to expand our scope of coverage significantly. In other words, we already covered the sub-set of the universe that we need to analyse for the new fund. We see the Asian Dynamic Fund as a natural bedfellow and extremely complementary to our original fund.

I cannot really comment on our competitors' methodologies. However, from KGR's perspective, our funds are very much multi-strategy and driven by the production of returns that are lowly correlated to equity, credit and interest rate markets. Accordingly, our exposure to equity hedge strategies is probably lower than the percentage that they constitute within the Eurekahedge Asian Hedge Fund Index. Trying to compare a conservative absolute return fund of funds with your index is, I think, like comparing apples with pears. By its nature, the index pays no regards to the riskiness of particular strategies.

We have not found it difficult to produce consistent low volatility returns with the universe of Asian hedge funds available. There is such a huge diversity of different hedge strategies that to try and generalise about investors' expectations is very misleading. In Asia, markets are less efficient and opportunity sets are bigger for sure. I think it is more the case that investors expect funds of Asian hedge funds to provide a premium return to global fund of funds equivalents given the inefficiencies and general groundswell of economic optimism in the region. Accordingly, we regard this moment as an opportune one to launch a higher targeted return product.

The most obvious differentiation is that we are Asia Pacific specialists. Within our team, there exists over 160 years' of experience in Asian capital markets. We have put together an extremely complementary group that includes country and strategy expertise. When it comes to the genealogy of asset managers in the region or the strategies they are undertaking, we have a profound knowledge that is hard to replicate. Such intimate knowledge of the region and the fund management community is the key to our success. We think it is very early days in the development of the Asian fund of funds business but feel well positioned relative to the competition as it stands today.

There is no doubt that the average Asian hedge fund based outside Asia is larger than its equivalent within the region. Part of the reason is that many investors want local access to their managers more than on an occasional basis. There is greater familiarity with hedge fund management in the West and it is still easier for managers there to raise capital compared to the East. We expect this to change over the course of time. It is still very early days in the development of the Asian hedge fund industry.

We are Asian specialists and only feel qualified to comment on the Asian fund of funds industry. At present, rather than consolidation, we are seeing several new Asian funds of funds starting up. Frankly, we welcome these new entrants. With the current high growth in the number of Asian hedge funds, there is definitely room for others. However, KGR Capital has been honing its processes and systems for the past three years so we like to feel that we are at a distinct advantage when compared to those who are starting up now or quite recently.