The State of Hedge Fund and Fund of
Investor Select Advisors
is a fund of hedge funds advisor, managing assets in 9 multi-manager
portfolios primarily on behalf of institutional investors
and distributors. It has in excess of US$340 million in assets
under management, allocated to 57 hedge funds globally and
over a dozen in the Asian time zone. Its 15 staff members
include a research team of 6; 3 are located in Asia.
Peter Douglas has been researching hedge funds in Asia since
1998. He has 18 years' experience in the asset management
industry, gained in London, Singapore, Sydney and Tokyo. After
spending 10 years with the Foreign & Colonial group of
asset management companies, he was a director of Aberdeen
Asset Management Asia for 3 years before founding GFIA pte
ltd, a strategy consulting firm focussing on the asset management
industry in Asia. He has been managing director, Asia ex-Japan,
of Investor Select Advisors, since 2001. Peter has an honours
degree from the University of Exeter, UK, and an MBA from
INSEAD, France. He was the founding honorary secretary of
the Financial Planning Association of Singapore, and is the
Council Member representing Singapore for the Alternative
Investment Management Association.
Interview with Peter Douglas
- Is there a concern now that hedge fund investors are
aggressively asking for capacity from new Asian/Japan hedge
funds; and that subsequently your firm may have to rush
its due diligence process to get into a start-up before
I still don't see that many managers, outside Japan,
hitting capacity that quickly. There's just as many that
are shutting down for lack of assets (including some arguably
strong names, such as Blue Border). I think there's still
a year or so before we really need to be chasing the brand
Fortunately, ISA has analysts on the ground in Australia,
Hong Kong, Singapore, and Tokyo; and has long-standing
relationships in the region. This means we tend to get
a fairly early 'heads-up' on new managers, and that, if
we need to, we can get the groundwork done quite quickly.
Generally, though, our portfolio needs drive our research
process, as opposed to imminent manager closure, and we've
not yet felt pressure to make allocations faster than
In fact, I'd say that one of the most attractive characteristics
of Asia right now is that there are a reasonable number
of world class strategies, that typically do have capacity
available, and allocators have the luxury of having the
time to do proper research work before committing capital.
The flip side of that coin is that most Asian managers
that I've spoken to who have been asked for capacity guarantees,
see them as tactical agreements that they'll review once
asset size builds. I therefore wonder how useful a capacity
"guarantee" really is in practice (although
it's undoubtedly a useful marketing tool for the fund-of-funds
What I do see, though, is that increasingly some allocators,
especially from within the region, are asking Asian managers
for fee deals and discounts as an incentive to support
their new launches, and that bothers me. My personal experience
over the years is that buying investment management skills
on price is a strategy that often ends in tears.
- As an investor based in Singapore, are you finding
interesting new launches in the City?
Although I'm based in Singapore, I don't really see myself
as a Singapore investor - it just happens to be where
I live! It is however one of the easiest places from which
to run a regional "knowledge business" such
as a hedge fund. I'm the AIMA council member for Singapore
and we've seen membership grow over the past 18 months
from two firms to over a dozen now, including a couple
of major institutions as anonymous members. Another phenomenon
is that some managers (Speedwell, for example) are putting
satellites in Singapore. I think this is driven by Singapore's
very low cost of establishing and running a business,
and its comfortable "Midwest" lifestyle, rather
than any overwhelming strategic imperative.
What should the role of the Singapore government
be in supporting new hedge funds in the City?
My personal view - with which some would disagree - is
that the government should keep well clear of trying to
stimulate the domestic hedge fund industry. Hedge funds
inhabit a Darwinian environment, so making it easier for
managers to set up here would risk breeding weaker players
and - more importantly - developing a reputation for Singapore
as a haven for second-tier managers. However, public sector
institutions are beginning to allocate to hedged assets
(mostly global best of best, for now) and that builds
visibility and credibility for the industry. That's valuable.
- With the recent clarification by the Singapore government
regarding investment in registered fund-of-funds and hedge
funds, are you expecting local retail investors to be a
lucrative area to raise money for Investor Select Funds?
No. We build fund-of-funds primarily for specific clients;.
so unless we work with a local manufacturer there is not
much interest for us in Singapore retail. Furthermore,
the retail market right now is all about structured product
- the terms of the structure are what sells, and the underlying
asset is far less important, whether it's an equity index
or a hedge fund. Institutional may be more interesting,
and there's considerable existing demand from "high
net worth" investors with offshore assets.
- With the opening of stock lending in South Korea,
there is the expectation of many more Korean-only hedge
funds starting up in the next 12 months. Do you think these
would be of interest to fund-of-funds managers?
I've reviewed a number of pure Korean funds, but haven't
yet found one that would fit our portfolio needs right
now. We find the risk of a single-market Asian hedge fund
difficult to deal with in a fund-of-funds context and
so have hung back, though that stance may change in the
future. However more aggressive investors should find
some rich pickings in the newer Korean managers, especially
in 12-18 months' time when they've got used to running
the short side of the portfolio. There are also some very
interesting opportunities to trade volatility in Korea.
Although there will be some managers looking exclusively
at Seoul, I suspect that the bigger story (and the bigger
source of capital) will be existing Asian and global players
increasing their exposures to Korea.
What could be some of the biggest issues concerning
the Asian hedge fund industry in 2003?
In the very near term, many managers are feeling thoroughly
'whiplashed' by 2002; and rebuilding exposures, rethinking
risk controls and portfolio construction, and looking
for themes and trades with confidence, may slow many regional
Further out, the ratio of capital made available, to
opportunities made available, will be more acute in 12
months' time. Although I don't think there's an imminent
capacity crunch, the capacity of the underlying capital
markets in the region is limited and if investment in
Asia does become fashionable, aggregate returns could
- What are some of the biggest market risks for Asian
hedge funds in the next 12 months?
One man's risk is another man's opportunity, so this
is all about the characteristics of the Asian markets
over the coming year. I'm not a macro guy, but it strikes
me that the biggest continuing trend in Asia is how the
local bourses are globalising; that the same influences
that drive the US equity markets, for example, drive Asia:
institutionalisation, the disappearance of the individual
investor (he's buying mutual funds or day-trading froth),
the absence of liquidity in second-line names, the implosion
of trading costs, the increasing choice of derivative
products, etc. There are still plenty of opportunities
in Asia but it's not the same place it was pre-crisis,
and post-crisis it's becoming a collection of mini-me
markets. The other main implication of this trend is that
Asia is judged alongside major markets as a competitor
for investor capital - and, despite valuations and mis-pricings,
the "micro-cap" nature of Asia is sidelining
the region. From a global perspective, Asian capital markets
are increasingly made up of a myriad of micro-caps, special
situations, distressed assets - and a homeopathic sprinkling
of maybe a couple of dozen liquid names across the entire
There will continue to be a great supply of distressed
assets, with the People's Republic of China increasingly
proving fruitful. The fixed-income markets, especially
corporate, will continue to deepen as Asian corporations
manage their balance sheets in a more sophisticated fashion.
We may see (or I may be predicting this again for 2004!)
some real substance to the M&A market, and therefore
some event-driven opportunities in the region. The real
shift is the marginalisation of Asia. Managers may be
able to find better stock to borrow than a couple of years
ago, more fixed income, etc
but fundamentally, liquidity
is scarce and getting scarcer, and returns are getting
lumpier. For some managers and strategies, that's a boon,
for some, it'll be terminal.
- Should the decrease in liquidity across the region
be a major concern for hedge fund managers?
Yes, though as I've said, only a handful of Asia ex-Japan
managers are remotely close to capacity so it's not yet
life-threatening. I think it's a big concern in Japan;
some managers I speak to have quietly halved their estimates
of their strategies' capacities during 2002 - the flip
side of that may be that some of the largest funds that
were at -or close- to capacity at the beginning of the
year must be in the red zone already. I also think that
the "long clever small cap, short dopey dinosaurs"
strategy of many Japan long/short managers is carrying
increasing risk on the long side. Maybe we're close to
the bottom on the Nikkei and we'll be carried up by the
market, but I'd still look closely at portfolio liquidity
in Japanese managers.
As I mentioned earlier, the marginalisation of Asia is
causing some structural changes in the way capital markets
in the region are functioning, and I look for managers
that have understood that structural change and are doing
something about it.
Do you believe that the risk control systems for managers
in the region have improved significantly over the past
I think one of the characteristics of the industry in Asia
is that it's unapologetically dynamic. Many managers are
running their first hedge fund; market characteristics are
still changing rapidly; investor activity is developing,
etc. One of the things I look for is the degree of organisational
learning and appetite for internal change within a manager.
Part of that is, of course, developing risk controls. So
yes, many managers now have markedly different - and, on
the whole, I believe more effective - risk controls compared
with their initial phase, and that's admirable. I've invested
with more than one manager that I wouldn't have considered
initially, as not having the right controls in place (or
not implementing those controls properly), but who has developed
sufficiently over the years so as to instil comfort.
Are you finding Asian investors interested in Asian
or Japan-only fund-of-funds?
There's huge interest in pure Japan fund-of-funds. I think
the world has understood that regardless of what does or
doesn't happen at the policy level, micro Japan is mutating
rapidly, and that must create big opportunities on both
sides of the balance sheet, and therefore Japan long/short
equity, mainly, is the way to go, and that understanding
these managers takes specialist research. One of the characteristics
of the Japan space is how geographically spread it is. Our
Japan fund-of-funds product uses managers in the U.S.A.,
London, Tokyo, Hong Kong, Singapore, and Sydney - we have
analysts working in each of those locations and you really
need that global reach to do Japan well.
We don't see a huge demand for Asia ex-Japan fund-of-funds
at the moment. I believe it's an attractive asset class,
not because Asia is sexy, but because you can access an
interesting pool of non-correlated talent that still has
good capacity. That's not a high-profile story, and for
now we don't have much capital invested relative to the
research effort I've invested over the years in Asia.
Much of the demand that my managers are seeing is from
global portfolios adding in some Asian capacity (which
we are also doing), which is an entirely sensible diversification
now that there is sufficient quality in Asia.
Investor Select Advisors
+1 212 744 9100