Ep 5: Can Asian Hedge Funds take over the world? (w Bryan)

Sato: I actually wanted to discuss with you, you know, for the hedge fund landscape in Asia versus the West. Maybe you can just share a bit more, what’s the differences, you know, a layman like myself could actually look out for. 

Brianne: If you want to look at it in a very macro perspective, the hedge fund landscape in Asia is quite nascent.  

Sato: Sure, what does that even mean? 

Brianne: It just means that it’s not totally new la, but then if I were to use it similarly to the private equity scene, it’s just quite similar, where both the hedge funds and the private equity scene here, it’s still considered quite junior. And like, you know, not as mature as compared to the West. 

Sato: Not as storied? 

Brianne: Yeah, not as storied in terms of popularity. Sometimes it’s not as popular in terms of fund size as well, definitely not as large. In terms of return, some days a bit questionable. Yeah. So I think that these are, these are some things that have come up over the past few years, and I think there’s,  a whole reason  for this.

 I think that the biggest reason for why this is like that is just because of the fact that in the US stock market, it’s just more volatile. You look at the NASDAQ, you look at the S&P 500. This is the returns. If you look day to day, sometimes you can trade like maybe +/-5%.

And that’s just quite volatile compared to what you see here in let’s say Singapore, or even Indonesia, or even in China. 

Sato: I want to bring it back to the point you mentioned about volatility. I mean, for the benefit of our listeners, you know, in your own perspective, what makes the US more volatile compared to Asia?

Brianne: One is the fact that there are more people who are trading in the markets. 

Sato: Trading in the market. Okay. More day traders? 

Brianne: More day traders. There are more people who actually treat that as a potential source of income, versus let’s hear Singapore and Asia. And the reason why this is the case is because Asians, we tend to have a mindset of saving.

Sato: Okay, more conservative, risk-averse? 

Brianne: Risk-averse. So most of us would not, let’s say, take $50,000 and let’s say, put the money into some equities, right? Like that is not what normal people would do. 

Sato: This is not how we are brought up, basically. 

Brianne: That’s not how we were brought up. Maybe things are changing, especially the younger generation. We have like, robo-advisors like your Stashaway and so on. But then again, these people are not investing in individual equity sometimes. They are just putting into like things where they invest in the ETF, right. And the returns there are much lower and definitely the risk is much lower as well.

So I think  all these contribute to the fact that you have much lower volatility here in Asia as well. 

Sato: Really? Based on your perspective?

Brianne: Yeah based on my perspective, at least in Singapore. 

Sato: But then what about the West? Are they a total opposite? 

Brianne: I’d say that the West is not that it’s a total opposite, but then the dynamism of companies there is definitely much higher.

So if I will look at it from a whole company perspective, meaning that like, let’s say a company when it’s at seed stage, right? As a startup, all the way to pre-IPO and then IPO. At each stage, you find that the US startups and the US companies tend to have higher valuations. 

Sato: Okay. Why is that so? 

Brianne: So the reason for this is mainly because when you are in actually in Silicon Valley and so on, firstly, people have the certainty that, you know, they have the good talent there, so good talent makes up a lot of valuation of let’s say why the company’s revenues are going to be recurring. And therefore this justifies higher evaluations or higher EV, enterprise value to revenue, or high enterprise value to EBITDA margin. So all these contribute to the fact that they are valued a bit higher.

The second is that it’s also traditionally the fact that in Asia, we tend not to also trade as much as I mentioned earlier. And also the fact that the valuations  here are just much lower compared to what you would actually find in the US. Conservative mindset and  so on.

And I think that that also has brought, let’s say, several Chinese companies to not decide to let’s say, list within China itself or even the HKEX or the Senzhen stock exchange. But they rather list in NASDAQ. Yeah. So this was prior to even the entire Donald Trump thing, right? So the reason for this is, it’s just economics. The valuations are much higher, I’d list in the US. 

Sato: Yup. I mean, you’d probably list somewhere that you can, you know, get a lot of investors, try and pump money in. I mean, on the flip side, I think STI is a bad example of something,  you know.. Do you think this — would there be a shift in future or how would you put it?Would this remain the status quo? 

Brianne: I think that apart from the conservatism reason, right. It’s also the fact that at the end of the day, it goes back to politics and who controls the cash. What I mean by that is that the US dollar right now is the main currency, right? So after the Bretton Woods system fell, after the gold became not the standard, the standard now is the US dollar. And what really happens about US dollar being the main currency is that that’s the only way that any international investor would invest within a market. There’s high liquidity in that space. And therefore people would flock to that stock exchange, rather than to let’s say Singapore.

But of course, as what you said, I think with the rise of China, there might be a huge new thing. The only thing about China I would actually say is that China is a very highly regulated places. Not that NASDAQ and not that S&P is not regulated, but then it’s regulated in a different way where, it’s not regulated to the point that, you know, the Chinese government needs to have the ultimate say, right. And the final say about everything. So of course, you know, all of us know the Ant Financial IPO that didn’t go through. 

Sato: But I mean, correct me if I’m wrong, based on what I read in the papers, I think it was just a, you know, the president, after a speech given by Jack Ma. And he’s like, you know, you’re criticizing my government, you critiqued, and, I’ll just shut the whole thing down. So what are your thoughts? 

Brianne: I don’t think that’s the only reason. I think that the Chinese government has certain kinks to take out first and to ensure that it’s able to really fully stomach the consequences of what Ant Financial IPO is.

And that also includes a few things, right. I think that right now in China, you would find that it’s where high yield bonds are mostly found and the amount of debt that is in China, and you want to add more, like you want to IPO this thing and like, sort of like make this, and in a way not really making debt tradeable, but then essentially, Ant Financial is after all a bank, right?  

Sato: Yeah. I mean, financial services. They can’t really call it a bank ’cause they’re not regulated. 

Brianne: Yeah. Not regulated the same way, but yeah, you’re also having loans and all these other things in the market, and that destabilizes certain things within the Chinese economy.

And I think that right now, because of all these things, I don’t think anyone really has an idea of what’s going to happen next. Whether or not the Chinese stock exchanges are going to be similar to what the US is going to be. Because right now you still have all your caps right on the upper limits and lower limits, much unlike NASDAQ and all these other factors do affect evaluations.

And because it affects valuations and the increase per day, or even after a good news, even after a good news, if I say that I put a limit on your increase, it’d be like, why, why do you do that? And you know, like I’d rather just go to NASDAQ, where if there’s good news and my valuation increases so much more. It doesn’t make any sense for me to just put it in China. 

Sato: I see. Unless China opens up. Would you say it that way?

Brianne: I’d say that, like, unless China opens up, definitely. But there is a dichotomy here. One is that there are actually a lot of companies, Chinese companies doing Hong Kong IPOs.

That’s one. Second is that, however you’d find that a lot of these Chinese high net worths and, they do not want to put their money in China. And it’s always been a long time thing, right. You know, like I spend 20 years taking my money out of China. And then now you ask me to put it back to China, right? Like it doesn’t make any sense, like, how am I going to get my money out? How am I going to convert to USD? How am I going to buy other things that I want that is outside of China? 

Yeah so I think all these concerns together, it is a whole huge thing la, that’s why the Ant Financial IPO is also somewhat of a part of it.

And I think that nobody really knows, maybe unless you’re in like the central executive committee or like yeah. [Laughs] You’re like very close to people and you have an idea what’s going on. 

Sato: Yeah. I mean, but I mean, based on what you’re sharing, it seems like, you know, for the Asian landscape, it can never keep up with the West. Because of all these factors. I mean, do you feel that way? Will we ever overtake our Western counterparts? 

Brianne: That’s a very good question actually. I mean, I was thinking about it even before this episode. I honestly don’t know. I really don’t have an answer for this. I think there are a few signs though, that we can actually see.

The first is that you would actually find that China is slowly overtaking the West in terms of both its technological innovation and advantage. And for that itself, what does it mean, right? I think that what it really means here could be twofold. One is that it could actually mean that China could actually have let’s say, certain ways to actually make capital more efficient. 

What I mean by that is like, you know, Ant Financial and so on, it really takes money from people who have it and people who need it. And the transaction and the flow of money is pretty fast to the point that people can actually leverage all these things, make arbitrage, and then earn money from this. Yeah, this is just one way that the stock exchange could be a bit more robust compared to the West. But then again, the other thing is that, which is very  important, is the point of population. It’s just that China has just so much more population than the rest.

But how does it affect the stock exchange then? Honestly, it goes back to the central executive committee. Then it goes back to what their regulations are. So nobody really has an idea, but then in terms of GDP growth, in terms of let’s say, the growth in terms of infrastructure, in terms of startups in Asia, definitely this is going to boom. 

Yeah. So I think bringing it back to the macro perspective again, what my point of view here is, is that China would, and even Asia would actually rise in terms of infrastructure, in terms of the startups scene. You would have a lot more value being created, a lot more people within middle income, especially in Vietnam. In Vietnam we are already seeing this, a lot more middle income. But at the same time, does it really translate into the stock market? That’s a huge question that honestly, none of us, or rather, I don’t have an answer for that because it goes back to regulations, and it goes back to valuations.

So one is risk, or political risk or regulatory risk. Second is economic risk, right? Where I… why would I risk like lowering my valuation multiples when I could just bring it to the West. So all these, all these factors do come into play and  whether hedge funds in Asia really sort of perform better than the West.

So I think that’s definitely the main thing I would think about. And if I were to take a step lower, right. If I were to let’s say, before even hedge funds invest in these public companies, they were once your startups, right. 

And coming from the private equity/ venture capital kind of scene, what you’d actually find is that what these venture capital firms or even growth equity firms investing in Asia, they minus China out, right? Southeast Asia. The return there are not stellar. Like so for every dollar, and let’s say a family office or wealth manager, I would rather much put the money in a US venture capital. In general I think that like the US funds, and this is just average…… 

Sato: Double digit kind of returns?

Brianne: In ROI basis, I would say that like, maybe let’s just use TVPI la, right? TVPI is kind of like total capital that you invested, including dividends, right? Including dividends that you actually drew back. It’s actually 4x. 

Sato: 4x, four times. 

Brianne: Four times. In Asia, sometimes it really depends, especially if you’re  looking at the early stage funds, like your series A and before, you are actually looking at… sometimes maybe would be 1x. And sometimes with seed funds, some of them are not performing so well and therefore it could  even be loss-making in some sense. 

But then of course, if you’re looking at growth stage, series B onwards, which you find a lot of these venture funds in Singapore and in APAC actually looking at, they are around maybe, you’re on a 3x.

Sato: Okay. Not too bad. 

Brianne: Yeah, that’s not too bad, right. But then what, let’s say, a US fund, a good US fund actually gives is maybe a  4X or even higher. So I think that on this basis alone, and this is investments la, right? This is not direct investments. This is the fund level. 

So this just gives them, just any wealth manager, this perspective that how am I gonna justify to my investment committee that I invest in Asia, when clearly like, the whole growth story is not working in that way, right? Like,  because the growth story or rather, the story of anyone investing in Asia is that hey, Asia is actually  growing. It will surpass the West. And it will grow much faster. Therefore my returns are supposed to be better, but then that story is not coming forth. So I think that that really impacts. 

And with the fact that, you know, the valuations here not being as high, they’re not easily as justified, what you actually find is that this also impacts upon the final evaluation when they IPO, and therefore also impacts the hedge fund returns. 

Sato: To sum it up, what is the biggest trend that actually pops up to you?

Brianne: I’d say the biggest one right now — and I mean, I’m sure no sorcerer or like some guy who look into the crystal ball, right — it’s still the fact that if you have allocation to US hedge funds, you should just do it, versus Asian hedge funds.

And the thing is that like, as any good hedge fund manager would say, you can never turn the tide, right? You are just one person. You are, if anything, even if you are a Centennial and so on, I mean, you could be a market mover in some sense, but especially when in Asia, especially when you are a family office or a wealth manager, essentially sometimes you are in LP, right.

And you are not sufficient enough to market move in that sense. And what I would say is why not, if there’s an allocation to a US hedge fund or US equities or long-short and so on, you should just carry on with that. And that’s really what I would say right now it is. It could be different in the future, but then my belief is that like, I mean, you’re not here to be a freedom fighter, right. 

Sato: Do you think that nationalistic feelings, you know, the fervor, could it potentially affect us as an investor because you know, you’ve heard of like boycotts, that kind of thing, and you’ve probably seen it happening right now. Do you think this could be one of the potential scenarios that, you know, the tides could be changed? Because what you share with us now is to follow the tide, you know, don’t go against, don’t be a contrarian, but what are your thoughts? 

Brianne: I think we have to divorce politics with money la, right? I mean, everyone’s realistic about it. Like, let’s put it that way. I mean, honestly, Chinese investors are still investing in US.

It’s not about nationalism anymore. It’s about what makes money, right? 

Sato: I do feel a bit of Asian pride, you know, and I was thinking, you know, how can you supersede our Western counterparts? Is it even possible? Because it seems like, you know, there’s no possibility because you know, it’s just the way it is. Maybe can you just share with our listeners, is there a particular scenario where we could supersede in future?

Brianne: Okay, this is a tough question because I have to set the context, right. It could be quite a long john story, but I’m trying to simplify in my head. So the difference between the largest firms in the US and the largest firms in Asia is that the largest firms in the US are not family-owned. The largest firms in Asia are family-owned.

And whether you like it or not like, it’s family-owned and that’s tough, right? Like you’re not going to let these guys have a lot of control and they’re not going to let like a hedge fund come to them and say that hey, you know, I’m just going to like, buy a huge stake of what you have and then they’re going to try and turn things around, right?

Like not everyone is going to do that. But of course it’s like I would say that there are a few exceptions. So, I think many of you here might have heard of Richard Chandler. So Richard Chandler is one of the richest people here in Singapore, he’s originally from Australia, New Zealand. He has a group called Clermont Capital, Clermont Group. 

It’s all public information. I’m not saying anything that is private, right. He believes in this thing called activist investing. And it’s very interesting because it has a very interesting kind of like strategy in order to sort of  buy and own, and also like make more efficient, the companies that is in a public space.

So I feel a lot of it is like private equity, but private equity for the public space. So that’s the kind of thing that he does. That could work and that could actually mean that we perform better than certain US hedge funds, right. But then at the same time, how many of these companies are there, where they’re not family owned?

And most of these family owned businesses, they want their kids and they want the next generation to take over. It’s a very Asian thing. Like you don’t find it…

Sato: You think it’s an Asian thing?

Brianne: I think it’s, I think it’s everywhere actually. But the thing is that it’s particularly in Asia, like, I don’t think in the US you have one company owning a monopoly of everything. Like let’s say Hong Kong,  for example. Telcom. The first thing you wake up in the morning, you use a telephone line that’s owned by Li Ka Shing, right. Then you go in and take the MTR, which is also partly owned, right. And then after that you go to the office, office building is owned by who? Yeah. It’s maybe by him, right? 

Like, and then you go and eat your lunch. You go to the supermarket and all these things are owned by one person. Yeah. You don’t see that in the West. 

Sato: I mean, what you’re trying to say is that, you know, a potential scenario could be,  you know, less family networks and  connections. Would you say that’s the thing that, you know… the only way that we could probably supersede is that it becomes less controlled by a single family, you know, that kind of…? 

Brianne: It  could be less controlled by a single family, but it’s still multiple families. 

Sato: So we probably have to break out of this entire family…  

Brianne: It’s hard, it’s part of our nature… 

Sato: Sure, but I mean, it’s just a scenario that we are painting for our listeners. 

Brianne: I don’t think it’s possible. I honestly don’t think it’s possible. 

Sato: Maybe I just put it to you. What is a scenario that is possible and feasible?

Brianne: It could be where you have more family businesses actually not passing on the next generation. Give you some examples, right? You have Eu Yan Sang, recently sold to Tower Capital Asia. So I mean, the family is still involved, but not as involved because it’s still a private equity firm that’s running it. And they want to change Traditional Chinese Medicine into a P&G?

How do you make sachets of like all your ginseng tonic and then make it available in everywhere in the world, in a P&G kind of style, right? I mean, this is a possibility where they could even, I’m not sure whether it is delisted, but they could relist the thing and the hedge funds actually own a certain portion of it as well.

I mean, these are some examples, right? Where things are changing in some ways. And you also find perhaps education as well. Education, you have like preschools and so on that are very ripe for IPOs  or even… Not even ripe for IPOs, but ripe for private equity takeovers at a much later stage. Because at the point in time, they’re either too bloated or the family that owns it, they want to exit.

So these are some scenarios where it creates the liquidity. It creates the companies even that allows hedge funds to actually participate in these things. Versus let’s say, hedge funds actually just participating in just companies that are still very much a family-owned.

So that’s a whole new different ball game versus participating in X family-owned companies that are no longer owned by families or perhaps owned by institutional investors. That could be a scenario where things are slowly changing. Although, I really don’t know how this is going.

I mean, look at Tatler List, right? Tatler List is still rising more and more, second gen, third gen starting their own businesses within the family business.

So, yeah, I think that’s why I brought up the point of private equity and institutional investors where even let’s say in private equity in, let’s say a KKR or even that kind of like big buy out funds. They struggle to find very good targets here in Asia, because there just isn’t as many, most of them are already owned by families and they don’t really want to sell them.

Sato: You know, basically I think for this episode, you know, will Asian hedge funds take over the world, I think still remains a question mark for now. But I think we have a deeper understanding and you know, who knows what the future will hold? So Brianne, I just want to thank you for being a part of this and yeah, thank you for your advice. 

Brianne: Yeah, thanks so much, Sato Shi. 

Sato: So arigato, my friends, and my deepest appreciation for joining me on this journey. Please reach out to us on The Financial Coconut socials and Telegram group. Everything can be found in the description below. We would love to hear from you and discover which other sectors of finance to demystify. Until then, ciao!