Tokyo: An increasing number of hedge fund managers in Asia are making loans to small companies as they search for more stable returns, according to the chairman of Singapore’s hedge fund lobby.
As many as 25% of funds managing a combined $200 billion (Rs8 trillion) in Asia extended such loans last year, Peter Douglas, chairman of the Singapore chapter of Alternative Investment Management Association, said. That’s up from less than 10% in 2006, he added.
A dearth of available credit from banks for small Asian companies has created a niche for funds, including Singapore-based EuroFin Asia and Hong Kong-based Cube Capital Group, which charge interest as high as 20% for short-term loans. The arrangements offer a way to stabilize returns for an industry roiled by the collapse in global equity and debt markets.
“This year will be a very big year for those credit-slash-special situation kinds of funds that get involved directly into providing liquidity,” Douglas said. “Hedge funds are much better suited to taking unusual risks because it’s a small number of experienced people whose livelihood depends on making the right decisions.”
Returns for hedge funds lending to small companies may average about 10% to the “low teens,” said Douglas, who’s also president of hedge fund consulting firm GFIA Pte.
Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.
Market swings triggered by more than $230 billion of write-downs and credit losses at banks and securities firms since the start of 2007 have hurt them. The average fund fell 2.83% this year as of 28 March, according to Chicago-based Hedge Fund Research Inc.’s or HFR’s Global Hedge Fund Index, which is updated daily with a two-day delay.
If the decline holds, it would be the biggest quarterly drop since a 3.85% slide in the second quarter of 2002 for HFR’s Weighted Composite Index.
Demand for credit is rising in a region that’s home to the world’s two fastest growing major economies, China and India. The Asian economy, excluding Japan, may expand 7.6% this year, according to estimates on Wednesday from the Asian Development Bank, or ADB, in Manila.
Though there are no estimates for credit availability in the region, “in most countries a majority of SMEs (small and medium enterprises) do not have access to loans from formal sources such as banks,” said Nimal Fernando, practice leader for microfinance at ADB.
In China, where the economy grew 11.4% last year, the banking regulator urged companies on 14 March to ensure “healthy” growth in loans to small enterprises, even as the watchdog clamps down on overall lending.
Cube Capital, with $1.2 billion of assets, offers loans to Chinese real estate companies. The loans are usually for three months to 12 months at interest rates of 10-20%, said founder Francois Buclez. “The environment isn’t going to be as supportive as it’s been, so you need to move towards alpha-creating strategies, and structured financing is definitely one of them,” he said.
Alpha refers to the premium an investment portfolio earns above a certain market benchmark such as the Standard and Poor’s 500 index in the US.
Christian Stauffer, founding partner of EuroFin Asia, a Singapore-based commodity finance hedge fund, said he invests in commodity producers and uses raw materials as collateral for making loans.
EuroFin’s loans average $5 million to $7 million, with rates that are 2.5 percentage points to 5 percentage points higher than the London Interbank Offered Rate.
The firm’s $70 million LH-Asian Trade Finance Fund has stakes in 12 Asian companies.
“We have seen recently a sizeable increase in the pipeline of deals,” Stauffer said. “I wouldn’t be surprised if it keeps increasing in the near future, because there is a need.”