Credit Hedge Funds Buck Industry Doldrums as Asian Bets Rally

(Bloomberg) -- What hedge fund doldrums? A group of Asian hedge funds are quietly posting world-beating gains after riding a rally in emerging market debt.

Serica Partners Asia’s credit fund, run by Ivan Lee, is up 30 percent this year, according to a person familiar with the matter, and Triada Capital’s hedge fund has surged 27 percent through September, the firm said. As a group, returns from hedge funds that focus on Asian credit are almost double those of a global index tracking funds of all strategies, according to Eurekahedge.

The managers are emerging as a bright spot in Asia as equity strategies, especially those investing in Chinese and Japanese stocks, have stumbled after losses earlier in the year. Globally, the industry is in the throes of the worst crisis of confidence in recent memory, with some of the biggest managers trailing market benchmarks after failing to anticipate the direction of the markets.

"Emerging-market credit has done very well this year and Asia-focused credit funds have benefited from holding this long view," said Anthony Lawler, a money manager at GAM Holding AG in London. "This has been a great trade."

Top Performers

Hedge funds focused on Asian credit have advanced 6.5 percent in the first nine months of the year, compared with 3.3 percent for Eurekahedge’s global industry index. About 80 percent of Asia-focused credit funds have positive returns this year, and they’re among the top-performers in the region, helped by rebounding commodity prices and a rally in some regional currencies such as the Indonesian rupiah, according to the Singapore-based data provider.

The only strategies in Asia that have performed better are relative-value and arbitrage. Record-low interest rates in developed markets sent investors flocking to higher-yielding emerging market debt. 

Asian credit has returned 8.5 percent in 2016, according to a JPMorgan Chase & Co. index tracking dollar bonds in the region, the most since 2012. Sales of dollar bonds by borrowers in the Asia-Pacific surged to a record this year.

"The inflow story into emerging markets is definitely a driver for our markets," said Job Campbell at Hong Kong-based Income Partners, which manages about $2 billion.

All Seasons

The IP All Seasons Asia Credit Fund, which focuses on dollar-denominated high-yield debt of Asian issuers and trades currencies as well as interest rate instruments, is up nearly 18 percent this year.

The Income Partners fund sold credit default swaps on Indonesian sovereign debt and built positions in certain corporate bonds, such as thermal coal company PT Indika Energy, tire maker PT Gajah Tunggal and PT MNC Investama, a firm that invests in businesses including media. The fund also invested in bonds of Vedanta Resources Plc., the world’s second-largest producer of zinc, and in the debt of Chinese property developers Kaisa Group Holdings Ltd. and Glorious Property Holdings Ltd.

Not all credit funds have been able to benefit in this environment. Singapore-based Saka Capital is closing its SakaCapital Liquid Credit Fund and returning money to investors as record-low interest rates dampen returns.

Serica Credit Balanced Fund, which trades bonds and credit default swaps, rose 2.1 percent in September, said the person familiar with its returns, who asked not to be identified as the information is private. The Serica fund bought beaten-up bonds of Indonesian and commodity issuers during the massive sell-offs in late 2015 and early 2016, and currency stabilization helped drive part of the return, said the person.

China Hiccups

At Hong Kong-based Triada Capital, whose founders include an all-female credit investment team, this year’s gain was fueled by a “number of corporate credit event-driven stories,”  said Jean-Marie Barreau, chief executive officer and chief operating officer. Increased demand by local institutional investors for high-yield bonds have contributed to 2016 returns, Barreau said. Bets on Chinese developers and banks helped, as did Indonesian energy and industrial companies. Vedanta was one of its best-performing investments this year as well.

Looking ahead, Barreau expect some volatility as the Federal Reserve starts increasing rates, fears of a global slowdown reignite and “hiccups in China and other geopolitical risks” surface.

Income Partners’ Campbell says future returns will depend more on finding individual bonds that have the potential to rise.

"A lot of the rally back from oversold valuations early in the year has been played out,” Campbell said, referring to market returns. "But you still have names where I could see a double-digit type of return over a one-year horizon."

To contact the reporters on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net, Suzy Waite in Hong Kong at swaite8@bloomberg.net. To contact the editors responsible for this story: Sree Vidya Bhaktavatsalam at sbhaktavatsa@bloomberg.net, Neil Callanan