Hedge fund managers can accommodate the level of trading liquidity available in Asia’s non-core markets, so long as the positions they are planning to put on are calibrated in advance and are mindful of the individual market conditions.
The TRADE Asia asked Sir Michael Hintze, founder and CIO of US$12 billion multi-national hedge fund CQS, if he felt the depth and liquidity in Asia’s capital markets were sufficient to meet his needs, especially outside of the biggest markets.
“Asia’s markets are liquid enough for us, yes, though I can’t speak for other hedge funds,” he said. “It may not be so easy if one is crashing around the markets, but we tend to work deeply with individual corporates, and haven’t experienced problems.”
He personally manages the CQS Directional Opportunities Fund, which was up 16% in 2013 and on average is up 20% per year since its establishment in 2005.
China is one of his favourite countries from an investment perspective and he is impressed with how the new political leadership has settled in. He believes that they have overcome concerns about their ability to manage gross domestic product growth to a level of around 7.5%.
“However, the Chinese authorities still don’t fully understand what is going on with the shadow banking system in China, and this is going to be a huge challenge,” he said.
Another risk that he tagged in China is that of the growing use of copper held in a stockpile and used as a financing mechanism, rather than as an industrial material. He perceives that a similar role may be evolving for inventories of iron ore in China.
In Japan, he believes that the quantitative easing stemming from Abenomics is a positive effect flowing into the rest of Asia. Whilst he gave a thumbs up to both Abenomics and Yen weakness (which he sees as a crowded trade, but is still a position that he believes in), he is less sure about the successes of structural reform.
“Low marks for progress on structural reform, though I acknowledge that such reform is a very hard thing to do in Japan,” he said.
Sir Michael, a former captain in the Australian army, seeks to get an angle on the possible impact on his positions from observing and interpreting global conflict situations.
At present he is most concerned about Russia flexing its muscles, and his trade to reflect that is to short certain European stocks. He paints a ‘nightmare scenario’ of similar Russian interventions in the former USSR states, with a knock-on effect of debt repudiation, and German manufacturing being hit hard if energy supplies are compromised.
In previous Asian visits, he has flagged the South China Sea disputes between China, Philippines and Vietnam as being the biggest potential hotspots, but currently sees the various parties as being smart enough to work it out.
In Asia today, he is concerned about the territorial disputes between Japan and China in the East China Sea, specifically over the Senkaku/Diaoyu Islands, and how a hostile relationship could prejudice a maritime trading route that accounts for a large volume of physical world trade flows.
“The chances of a military accident in the East China Seas are high, even if the risks of a real war may be low,” he said.