Value Partners' founder says most small funds won't survive the crisis
By TEH HOOI LING
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THE question is 'if', not 'when', investors' confidence in hedge funds in particular, and in financial institutions in general, will be restored, said Cheah Cheng Hye, founder and chairman of Value Partners, a hedge fund management firm listed on Hong Kong stock exchange.
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| 'An average investor should put a portion only of his fund in equities. One should have some cash and some funds in tangible assets like gold, and try to spread out geographically.' - Cheah Cheng Hye, founder and chairman of Value Partners |
One extreme scenario in the fallout from the financial market carnage is when politicians - heeding their electorate's clamour to penalise financial institutions for having lost their life savings - reduce financial institutions to utilities.
The argument is: Financial institutions in their current forms have failed miserably in their function to take care of the surplus of society. Hence they should just revert to providing the very basic of public service and be subject to government regulations.
But the likely scenario is the fund management industry consolidating into a few large players. Only those with a long track record, strong institutional backing, robust compliance standards, good clientele and a sustainable business model will be left standing.
One thing is for sure, said Mr Cheah in a conference call with Singapore journalists yesterday and that is: 'The majority of small funds out there won't survive the crisis. There's going to be a lot of casualties.'
Value Partners, one of the leading Asia Pacific asset management firms with a strong focus on China, was established in 1993. It too has not been spared the carnage of the market last year. Its flagship fund was down by nearly 50 per cent in 2008. 'That's our first down year in the last 10 years. There were only four years in our 16-year history that our fund lost money. We were in shock,' said Mr Cheah. 'Like most, we had not anticipated the crisis.'
The group's total asset under management plunged from US$7.2 billion in September 2007 to US$3.2 billion as at end 2008. Consequently, Value Partners shares weakened to HK$2.50, down from its high last year of HK$8.
The atrocious 2008 notwithstanding, Value Partners' Class Fund A units have chalked up an annual compounded return of 16 per cent since 1993.
Going forward, Mr Cheah, who is also the chief investment officer of Value Partners, said the firm will adopt a bar-bell strategy. On the one end, it will provide low cost no-frills type of products. The other end will be a more actively managed product that will seek out alpha.
The 54-year-old Mr Cheah hails from Penang and worked as a financial journalist with the Asian Wall Street Journal and Far Eastern Economic Review. He was later recruited by Hsieh Fu Hua, then with the Morgan Grenfell Group, in 1989 to set up the firm's equities research department in Hong Kong. A few years later, he founded Value Partners together with his business partner Yeh V-Nee.
Mr Cheah said like most, he thinks the world will take some time to emerge from the current crisis. This is unlike the previous crises most fund managers have experienced where recoveries had been swift.
The fundamental imbalance of the world - in which the West consumes beyond its means and East finances that consumption with their savings and feed it with their exports - will have to be unravelled.
'Asian countries need to reinvent their economies by building up their domestic consumption,' he said. 'Globalisation is in retreat. The export model doesn't work anymore.'
The Chinese are well aware of what needs to be done and are trying very hard to steer the economy in that direction. 'But it's going to take three to five years and there's going to be a lot of technical problems with this reform,' said Mr Cheah. For example, the government's encouragement of banks to lend more could lead to high levels of non-performing loans two to three years down the road.
Still, he believes China will eventually deliver on its promise and hence China equities should rank high if investors want exposure to equities.
Mr Cheah, however, admits the future outlook is far from certain at this juncture. 'An average investor should put a portion only of his fund in equities. The potential risk does not encourage one to put all in equities. One should have some cash and some funds in tangible assets like gold, and try to spread out geographically.
'We can't predict what the world will be like two to three years from now. You have to look out for your family,' he said.
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