Hedge Fund Intelligence HFI Hong Kong Report April 2014 | Page 16

HONG KONG 2014

HONG KONG 2014

prospects, with the RMB-denominated market in
China having added perhaps the most exciting new
dimension to the region’s fixed income landscape.
This has been an especially encouraging development for IP, which in July 2013 became the first independent, non-bank Hong Kong-based manager
to be granted an RMB Qualified Foreign Institutional Investor (RQFII) asset management licence
from the China Securities Regulatory Commission.
Nguy says there are three other key elements supporting the growth of Asian fixed opportunities.
The first is what he describes as the multi-year
Emil Nguy, co-founder
global credit quality trend, which is leading to a
of Income Partners
convergence in ratings between developed and
>> Unlike 10 or 15 years
emerging markets. “The multi-year upgrade cycle
in Asia, coinciding with downgrades in developed
ago, we now have a
readily identifiable captive markets, is leading to an increase in long-term
investment flows into Asia,” he says. “That means
investor base looking to
we no longer need to sell the concept of the asset
buy Asian credit >>
class to investors in Europe and the US.”
The second is that a much stronger regional investor base, encompassing institutions, family offices and HNWI, is taking shape
in Asia. “Unlike 10 or 15 years ago, we now have a readily identifiable captive
investor base looking to buy Asian credit,” says Nguy.
Third, with derivatives markets across the region increasingly accessible, liquid and cost-effective, absolute return credit strategies are growing in popularity. “When we set up, we were a long-only manager, in part because of our
knowledge base, but also because it was not until 2000 that Asia had a CDS
market,” says Nguy. “We were the first non-bank in Asia to sign an ISDA [International Swaps and Derivatives Association] agreement, which has allowed us
to achieve more of a balance between long-bias and absolute return strategies.”
The performance of some Asian credit strategies bears witness to the opportunities created by an increasingly deep regional derivatives market. Oracle’s

structured credit fund, for example, returned 76% between inception in 2010
and the end of January 2014. “CLO issuance last year was back to 2005-2006
levels,” says Teng. “That has been important to us, because it has given us much
more of an opportunity to trade in the secondary market.”

16 Special Report March 2014

© HedgeFund Intelligence

© HedgeFund Intelligence

THE PROSPECT OF CHINESE DEFAULTS
A wild card, as far as the development of the Chinese credit market is concerned, is the likely fall-out from the default of a corporate issuer. In March,
Chaori Solar Energy Science & Technology warned that it might be unable to
meet an interest payment on a bond issued in 2012, which would trigger the
first default by a Chinese corporate borrower.
Paradoxically, a number of analysts believe that a default by Chaori Solar
would help to support the development of China’s corporate bond market,
because it would increase the importance of credit risk assessment in pricing
and therefore enhance the efficiency of fixed income in the allocation of capital.
In a report published soon after Chaori’s announcement, Moody’s commented
that a default would also signal the regulators’ “higher tolerance for corporate bond
defaults amid financial market reforms”. This, the ratings agency says, is “in line
with the current central administration’s shift to more market-oriented policies”.
“Compared to the offshore bond market, bondholder protections are weak in
China’s onshore market, and bondholder-recovery mechanisms in the event of
a bond issuer’s insolvency are untested,” Moody’s added.
“For instance, the absence of covenants in the onshore market means that
bondholders cannot take proactive steps, such as enforcing accelerated bond
repayment, when bond issuers default on other debt.”

GROWING THE REGIONAL INVESTOR BASE
A fourth notable feature of the Asian hedge fund industry has traditionally been its
reliance on money from the US and Europe to buttress its growth, although managers say that an increasingly conspicuous trend is strengthening regional demand.
“We still have strong links with our traditional European investor base, but
over the last three to four years I’d say that about 40% to 50% of our funds
have come from Asia,” says Nguy at IP.
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