Research

1. Why is now a good time to launch an Asian fund of hedge funds?

   Now is the best time to invest because the main hedge fund strategies in Asia are all showing exceptional promise largely due to the opportunities arising from the ending of the Asian economic crisis and from mispricings that exist in Asia. We believe the following are the key indicators to investing now:

   A Young Market: One of the great attractions of Asian hedge funds is the relatively young nature of the market. Research shows that hedge funds often achieve their best performance in their initial years - and most Asian hedge funds are still less than three years old. Also, because they are new, most managers are not yet closed to investors.

   Distressed Debt Opportunities:The improving economic fundamentals of the region mean that 'distressed' companies are now successfully restructuring their debt. This process is being helped by the continual improvements in Asia's legal and judicial structures as well as generally improving corporate governance. The future opportunities for the Asian distressed debt strategy look excellent.

   Arbitrage Opportunities: Having withdrawn from the region over the last few years many international banks have yet to return, thus there is less capital chasing the significant opportunities that exist in the inefficiencies of the region's equity, bond and debt markets. These opportunities have been 'arbitraged out' of the major developed markets but can still be exploited in Asia.

   Equity Long/Short Opportunities: Opportunities exist arising from the wide dispersion in the quality of Asian stocks and their respective growth opportunities.

2. What sort of returns is the fund targeting and why are you comfortable with such numbers?

   The aim is to deliver a positive risk-adjusted net return in most market conditions of 10-12% per annum, with volatility of 5-10% per annum. We have done extensive back testing on the likely initial model portfolio of funds. With more than 50% of the funds in that model portfolio having more than three years performance history we feel confident that these targets may be achieved. Of course there is no guarantee that the funds used in the back test will actually comprise the portfolio. And, as we all know past performance is no guarantee of future returns.

3. What do you think are the main advantages of Asian hedge funds from an investment point of view?

   ABN AMRO predicts that economic growth in the Asia Pacific region will outperform the rest of the world over the next few years. Domestic demand and intra-regional trade will drive much of this growth.

   As Asia grows, fuelled by the rapid rate of growth in China and rising intra-regional trade, the Asia Pacific markets are gradually decoupling from the US and Europe, thus improving the diversification benefits of an Asian exposure. This set of macro economic circumstances has created the right conditions for hedge fund strategies in the region.

4. Is the fact that it is difficult to short equities in Asia an issue for you?

   In fact, short selling rules are being relaxed across the region and cross-border investment increasingly permitted. As Asia's stock markets liberalise, more opportunities for hedge funds are being created.

5. How is your Asian fund of hedge funds different from others in the market?

   Unlike the few existing multi-strategy funds focused on the region we will be offering a much more diverse and balanced strategic view. The existing funds primarily concentrate on equity long/short funds and exposure to the Japanese economy.

   We also bring the major benefit of being probably the largest global player in this product arena. This is important when you realise that the managers of Asian hedge funds are located throughout the world - US, Australia, UK, Switzerland, Hong Kong, Japan and the rest of the Asian region. Obviously keeping close tabs on all these players requires resources often beyond the means of smaller asset management groups.

6. Have you targeted the hedge funds that you will buy and what sort of funds are they?

   The fund aims to deliver its objective by investing in 15 to 25 carefully selected funds across a range of strategies. We have constructed the likely portfolio. Obviously we cannot name the funds prior to investing but we can give an indication of the strategy allocation. The currently proposed allocation is:

   • Credit Driven 33%
   • Macro 20%
   • Equity Long/Short 25%
   • Relative Value 20%
   • Cash 2%
   
   We believe such an allocation will benefit most from the economic and investment scenarios we have identified.
    
7. What will your investment process and due diligence consist of?

   We have taken more than 18 months to fully research the Asian hedge fund industry before this launch. There are currently over 300 Asian hedge funds managing approximately US$24 billion. Through our initial screening process we selected 150 funds to physically visit and quiz the managers on their investment processes and techniques. We will constantly monitor the portfolio and the universe in general in order to identify new investment candidates. We will also continually modify the mix of strategies and fund managers to optimise the fund's performance.

8. What qualifications do you have to run such a fund?

   The Alternative Investment Group at ABN AMRO Asset Management Limited works very much as a team. The team managing the fund comprises four investment professionals. The head of the Alternative Investment Group, Gary Smith, has 18 years' investment experience and has been investing in Asia for over 13 years. As the fund's senior portfolio manager, I have 19 years' Asian investment experience. The team has a strong network of contacts in Asia and in the fund management and broking world outside of Asia.

   The ABN AMRO Alternative Investment Group has been investing in hedge funds since 1998. In 2000, the Group launched the ABN AMRO Multi Strategy Fund and that fund has outperformed the HFRI Fund of Funds Composite Index by 8.2% from inception to end Jun 2003 and has lower volatility than the index. Through managing the ABN AMRO Multi Strategy Fund, the Group has already invested approximately US$120 million in Asian hedge funds.

Contact Details
ABN AMRO Asset Management Limited
United Kingdom
44 20 7678 4415