Singapore Hedge Fund

Alternative asset management in Singapore

Temasek Holdings Investment Performance and Transparency

On 8 June, I wrote in the Straits Times, a newspaper in Singapore that Temasek Holdings should not shy away from risk despite recent losses. Here is the article:

“Temasek’s track record has come under fire of late for a couple of false steps, notably its investments in Merrill and Barclays. These false steps are unfortunate, but so too is a general criticism of Temasek.

Temasek should not shy away from taking risk, particularly now. The last 30 years have seen steady growth in economies and wealth. The democratization of risk through the rise of derivatives, the growth of capital employed in active management across markets, in arbitrage and relative value as well as traditional investing, the widening and deepening of markets, have all contributed to a gradual reduction in continuous risk. Unfortunately this has also stored up gap risk. In the period of calm preceding 2008, however, the risk reward characteristics of investment in general were deteriorating as more capital chased fewer opportunities manifesting in higher correlation between seemingly unrelated investments, the need for more leverage to eke out decreasing levels of return, lower volatility across almost all markets. Risk levels became higher as risk perception became lower. Risk is highest in calm waters. Once the iceberg is sighted and collided with, risk is apparent and is converted from risk to damage.

The Fall of 2008 was such an iceberg. Markets are no longer as risky; they are damaged. For arbitrage and relative value investments, there is no better environment than damaged markets. Investors will be well compensated for policing of spreads, for bringing efficiency and price discovery back to markets. Equities may be cheap or expensive, but given the systemic de-risking of 2008, there are clearly relative value opportunities. Mergers and acquisitions have been more active than expected as companies seek strategic acquisitions, fire sales, consolidations. Bond markets have seen a recovery in issuance and take up has been healthy. Equity recapitalizations have been strong in emerging markets. All these are signs of a global economy healing itself.

The timing of the disposals of Barclays and BoA may have been unfortunate, but in the new world order, financial institutions are likely to be regulated as utilities with lower returns on equity.

The financial crisis represents a step change in the world order where the profligacy of the developed world is exposed and paid for over a period of decades, while the value creation and maturity of emerging markets raise productivity, economic growth and standards of living. Emerging markets are the source of demand and the source of supply of natural resources, whereas service economies in the developed world appear to be sidelined in the value chain. Perhaps there is some method behind Temasek’s new choice of CIO after all.”

The response to the article, from what I guess was mostly be a Singaporean audience, was mostly negative. Most Singaporeans are suspicious of Temasek’s track record and apparent lack of transparency. In many ways, Temasek’s main problem is a public relations one rather than a material one. While I neither defend nor criticize Temasek, I thought I would take a closer look at the objections to address my own questions about the organization.

While Temasek is known for its apparent lack of transparency regarding financial results and the precise details of its investments, the Temasek website provides some information. It provides quite a lot of information actually. But first, Temasek is 100% owned by the Ministry of Finance and is required to report only to its shareholders. One can of course argue that such responsibility should pass through to the citizens of Singapore as well, but that is another discussion.

In 2005,however , Temasek issued Yankee bonds which are a USD public bond issue regulated under the US Securities Act of 1933. Under the Act, these bonds are subject to certain standards and conditions including creditworthiness and reporting standards. Temasek received a AAA rating from Standard and Poor’s and Moody’s in December 2008. Temasek’s group financials are now available on their website dating back to 2004 in some detail.

I cannot comment about the management quality of Temasek. The website provides some investment performance information indicating a circa 18% annualized return on equity since inception. In the absence of volatility or other risk measures, it is difficult to comment on the quality of those returns.

The period of poor performance which is most in the public eye is 2008 where Temasek reported that for the period March to November 2008, the value of its portfolio declined by some 31% from 185 billion SGD to 127 billion SGD. This is a large loss, but the MSCI World equity index fell some 38% in the same period.

Using a rough and ready calculation, Temasek’s NAV increased by roughly 54% from Mar 2004 to Nov 2008. The absence of precisely comparable data means that I am using book value for the March 2004 valuation and market value for the November 2008 valuation. This is conservative I believe given the economic cycle. In contrast, in the same period, the HFRI Hedge Fund Index gained 15%, emerging market bonds (EMBI) gained 15%, global bonds (the old Lehman Agg) gained 19% and the MSCI World Equity Index made a total return of -4.22% with dividends reinvested. Note that the Temasek portfolio is slightly levered at between 0.9 to 1.4 X equity.

It is not a bad performance for an effectively long only private equity, strategic investment mandate.

From Bryan Goh

Jean Viry-Babel
senior partner
VBK partners

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Ex-Lehman, GIC Managers Fuel Asia Hedge-Fund Industry Renewal

June 12 (Bloomberg) — Former Lehman Brothers Holdings Inc. and Government of Singapore Investment Corp. traders are among an estimated 32 hedge-fund startups in Asia that are offering strategies beyond equities, after a record 180 funds closed in the region during last year’s global markets rout.

About 65 percent of hedge funds in Asia trade only equities, compared with a global average of 44 percent, data compiled by Singapore-based GFIA Pte and Eurekahedge Pte show. As a result, Asia’s managers underperformed their peers from Europe and the U.S. after the MSCI Asia-Pacific Index fell 43 percent in 2008, the biggest drop in its two-decade history. The U.S. benchmark Standard & Poor’s 500 Index declined 38.5 percent last year.

Mark Ong, the former head of global credit at GIC, manager of Singapore’s foreign reserves, is starting a hedge fund to exploit price discrepancies in the credit and equity markets. Paul Penkett and Stephen Cheng, former Lehman traders, started a fund in Hong Kong to trade everything from stocks to currencies.

“Having a diverse choice of strategies should help the Asian industry perform better than the market,” said Stefano Pizzo, managing director of Geneva-based Unigestion Holding SA, which invests in hedge funds. “It should also attract more investors.”

An index tracking Asia-focused long-short equity funds fell 22 percent in 2008, Eurekahedge reported. That compared with the 19 percent decline of the average hedge fund, according to Chicago-based Hedge Fund Research Inc.

‘Renewal Phase’

“This will be a renewal phase for the industry after the massive destruction last year,” said Melvyn Teo, a director at the BNP Paribas Hedge Fund Center at Singapore Management University. “Raising money is going to be tough though, despite the uptrend in the market.”

There were 17 new Asian hedge funds that started in the first five months of 2009 and another 15 may be set up, said Peter Douglas, a principal at industry consulting firm GFIA. The number of startups slowed to 17 in the second half of 2008 from 26 in the first half, Eurekahedge reported.

“Conservatively, we will see a net increase in the number of Asian hedge funds” through 2010, Douglas said.

The region’s hedge fund industry has been more focused on equities because most managers that emerged about a decade ago from the Asian financial crisis, which followed the July 1997 devaluation of the Thai baht, came from investment firms that bet on rising stock prices, a strategy known as long-only, Douglas said.

The number of new managers in Asia fell 26 percent to 43 last year from 58 in 2007, Eurekahedge said. There were only five startups in the fourth quarter, after last September’s collapse of Lehman froze credit markets. About 180 hedge funds shut in 2008 in the region.

‘Shakeout’

“With the shakeout in the last two quarters of 2008, a lot of hedge fund managers who weren’t so skilled left the industry,” said Han Ming Ho, who heads the funds practice group in Singapore at law firm Clifford Chance LLP. “We’ve really seen a much stronger profile of startup managers come to our doors.”

There may be more startups next year than in 2009 as capital-raising opportunities improve, Ho said. Managers plan to introduce so-called macro funds that seek to profit from broad economic trends and funds that invest in so-called distressed assets, he said.

“I haven’t stopped talking to startups since the beginning of the year,” said Ho, who helped open at least two hedge funds in the first quarter.

Macro Funds

Macro funds will likely be the best-performing strategy this year, a Deutsche Bank AG survey published in March said. About 47 percent of 1,000 investors surveyed in February by Germany’s largest bank said they plan to add allocations to macro funds this year, more than double the 21 percent in 2008. About 41 percent of the investors plan to add bets to distressed funds, according to the survey.

Andrew Gale, a former London-based executive at Dexion Capital Plc who started a macro fund on June 1, said investors are seeking returns that are uncorrelated with market swings.

“People are looking for strategies that are more skill- based than beta driven,” he said.

Gale co-founded Cavenagh Capital in Singapore with Lee Ka Shao, a former managing director of DBS Holdings Ltd.’s Central Treasury Unit. Lee produced returns that averaged 38 percent a year for the Singapore-based bank’s principal strategies business from 2001 to 2007.

Anurag Das, a former managing director at New York-based King Street Capital Management LLC, set up Rain Tree Capital Management in Singapore to start a distressed, event-driven and special situations fund.

Ong, who was a managing director at Merrill Lynch & Co.’s principal investing unit in Singapore, declined to give details on his capital structure fund at Barker Investment Management. Former Lehman Brothers traders Penkett and Cheng opened Omnix Capital Ltd. and started an Asia-focused multistrategy fund in May, Cheng said.

From Bloomberg

Jean Viry-Babel
senior partner
VBK partners

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