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Those expatriate fund managers still holding on for dear life in Hong Kong must wish they had left town right after the handover. Little over a year later and survival is the name of the game for local managers, right across the Asian region. There has been a bloodbath in terms of loss of assets and heavy redemptions. Fee income for the custodians and trustees has been decimated. And in the midst of all this, there are a million and one problems to be sorted out. It is not a fun place to be right now.

Shane Norman, head of the Hong Kong-based fiduciary rating service RCP, says that for fund managers, the past 12 months have been undiluted misery. Asian assets under management have fallen by 50%-plus, much more in some cases. In many instances, the losses and redemptions have taken fund assets down to uneconomic levels. Most managers would say that, if a fund has assets of less than $10m, it is losing money for the manager. There are now several Asian funds which have barely $1m-2m. This must mean the closing of many such funds and their merger with other Asian vehicles to create some kind of critical mass."

Actuarial consultant Stuart Leckie adds, "It's havinga pretty severe effect, and on top of the decimation of assets, the market has seen massive net withdrawals from retail funds, figures are 50-60% down on last year."

Because so much of the money managed in centres like Hong Kong and Singapore is part of Asian dedicated mandates, the big name managers have been as susceptible to the downturn, if not more so, than the boutique players, some of whom are able to be more fleet of foot. As an example of this effect, Schroders in Singapore has seen its funds under management fall from $5bn to $3.2bn. Total funds in Singapore are something like S$160bn, 80% of which is money sourced from outside of Asia.

Norman says, "By and large, it is the long-side-only firms which have been hit hardest, while the hedge managers which have come out the best. For a rare few, indeed, the 1997 Asian market crash was the making of them."

Sloane Robinson is a case in point - assets under management went from around $600m in mid-1996 to well over $3bn at end-1997, while the firm's Asian fund was up 83% for the year. Most of the other Asian hedge funds saw gains of 9% to 41% in 1997. Regent Pacific's Hedge Fund, at +41%, ran second only to Sloane Robinson as top-performing Asian fund of the year.

Although Indocam Asia, Dresdner RCM, HSBC, Jardine Fleming, Schroders and others have all suffered badly, they are sufficiently widely diversified to take the hit in their stride. Norman adds, "The bigger long-side-only firms are, in almost all cases, subsidiaries of large multinational, multi-line asset management organisations and, although the downturn has severely damaged assets and probably all but wiped out profits in the region, these firms as a whole have seen adequate compensation from the gains made in the US and Europe, at least until mid-summer 1998."

Edna Chan at research group FundXpert in Hong Kong confirms that the much-maligned hedge fund fraternity has in fact proved its worth: "The AHL funds have not only perfomed very well, their sales are continuing to rise. Their newest fund, launched two months ago, is the best selling fund for the last quarter, even following the LTCM collapse." Chan says in Hong Kong, to the beginning of October, 10 to 12 funds had been suspended because of their uneconomic size, "one or two from big names including Jardine Fleming".

Indeed JF is as aware as anyone of the need to close loss-making, and more to the point, poor performing funds. Paul Smith, managing director of Bermuda Trust in Hong Kong says, "I think we are now entering phase two of the crisis, where fund managers will collapse unprofitable product. The problems that remain will come from small unprofitable funds, and I think you will find that the likes of JF and Schroder will be more hard-headed than you might imagine. There is no short-term prospect of these funds getting back to a manageable size and their performance will have been completely flung aside, so isn't it better to close down and wait for a better time to launch these funds afresh?"

With each fund, the management will have to weigh up the prospect of being able to transfer investments while retaining the business. Smith says that within the next 12 months "I would expect that 10 to 20% of existing products will be lost".

Norman suggests the really badly wounded have been long-only managers who do nothing but Asia. "There are not so many of these, however, and most of them are boutiques serving private banks, funds-of-funds and big private clients.

The best known of them is probably Lloyd George Management. However, this firm, by dint of an extraordinarily good 1997 performance in Asian smaller companies (relatively speaking, that is - the LG Asian Smaller Companies Fund was down 6.5% in 1997), has attracted enough new business to weather the storm reasonably well."

Meanwhile, a small player that has emerged virtually unscathed is Value Partners, which specialises in smaller companies in 'Greater China'. Its "A" fund was down only 2.9% in 1997 and, although it has done much worse this year, the firm has found a strong new US shareholder and is opening a new office in Singapore.

In the case of the group like I mPac in Hong Kong, the problems are more deep-seated. As detailed in IPE's September issue, ImPac has not fully recovered from senior defections and was already in the process of restructuring before the latest market setbacks. Norman says, "Even from day one it was not the most compelling commercial proposition. They only raised $35m into seven funds at the launch".

Regent Pacific has been the subject of much speculation, largely as a result of its heavy exposure to Russia. Responding to a high level of enquiry regarding Regent's stability following the collapse of the Russian equity and bond markets, RCP placed its rating under review. This forced Regent to make its position clear, which is that with $148m in shareholders' equity, it could withstand even a total write-down of the approximately $50m that was invested in its own funds. Regent boss Jim Mellon reiterated that the group remains net debt-free and operating profitably after writing down its investment in the Russia and East European funds.

Hong Kong's changing fortunes are predicated not just on the bad feeling caused by intervention in the stock market by the HK Monetary Authority, but on the fact that the long-awaited mandatory provident fund (MPF) will now be put off to some distant time. The project has been badly handled from the beginning, with the bare minimum of consultation and involvement for the fund professionals. The current MPF committee contains only bureaucrats appointed by the offices of the chief executive Tung Chee-hwa. There is a lot of bad feeling among those, such as the custodians and trustees, who have invested time and resources in the MPF project, that a great opportunity has been lost.

In many ways Singapore now offers a more stable environment. People are starting to take seriously the idea that Singapore could take over as the hub for Asia, outside of greater China. RCP's Norman suggests that, "Singapore is probably where you will find the strongest of the Asian survivors, assisted by the government's drive to open the huge Central Provident Fund to external management. At least S$30bn is ear-marked to be mandated out over the next three years. I would go so far as to say that, if you want to latch on early to, I believe, one of the main long-term consequences of the Asian crash, it is that Singapore is now moving to overtake HK as the main ex-Japan regional centre for asset management. Personally, and this is not an official RCP view, I think the Lion City will succeed in that aim."

For all that, confidence remains low in Singapore, largely because of the squeeze on margins. It has been said there is not a single manager that is currently profitable in the whole of Asia. In Singapore, margins have always been fairly keen. As one fund manager drily noted, "imagine having to share fees of 30-40 basis points with the London office."

As for who is to blame for the crisis, it does appear that hedge funds have been painted as the villains of this piece. HK financial secretary Donald Tsang talks glibly about the unsettling nature of hedge fund investment. But talk to the consultants and the custodians, and they all say this is really missing the point.

Bill Tatham of insurance brokers Towry Law International says, "Although there has been a lot of bad publicity about hedge funds, there are many alternative investment funds and hedge funds available which have been doing extremely well across the recent market crisis. Some of these we recommend and have either lost very little during market volatility or have actually profited."

Norman says, "I'd like to see some research into the extent to which proprietary trading books of the major banks have been exposed to hedge funds, to find out what level of risk is being taken. When you talk about levels of transparency, if the regulators really want to tackle the issue of leveraged bets, they would find it more effective to look at the control of the banks than to try clamping down on the hedge fund industry. It may not be possible to track down the sort of quantum of bank exposure to alternative investments, but I would expect it to be anywhere from 20 to 100 times the size of hedge funds exposure."

Paul Smith agrees: "If you looked at who has been caught out by LTCM or who is behind most of the big mutual fund debacles, it is not the boutique houses or the offshore investment specialists, it is the major institutions. The banks are behind all of the major financial centre problems of the last four years. That is where regulators get it wrong. They knock down the small players and don't address the real problems.""

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