Andy Abraham says he’s been following Asian markets on paper for years, but only now is he looking to trade them in a serious way.
“The opportunities are there,” the New York-based commodity trading advisor (CTA) said at this year’s Futures Industry Association Expo in Chicago, right after meeting with representatives from the once-provincial Tokyo
“I’d love to trade these markets if they can lower the entry barriers,” he said. “And from what I can see, that’s exactly what’s happening.” Indeed, as we have reported over the past five years, regulatory regimes across Asia have been relaxing restrictions on access to their markets for foreign institutions, including CTAs, and many exchanges have responded by upgrading their technology to handle electronic orders delivered via the FIX Protocol. All Asian futures exchanges, including those with outdated technology, are tied into the global trading apparatus with long-standing, multi-regional clearing firms like Newedge, JP Morgan and MF Global and long-standing giants like HSBC, which are moving into the hedge fund/CTA arena with a new offer.
Companies like these and Jaypee Capital Services, one of the leading brokerage and proprietary trading firms in India, anticipate a surge in new managed money with an Asia focus over the coming three years and are scrambling for a piece of it. And no wonder, as hedge funds with an Asia focus have been one of this past year’s brightest spots in terms of performance and are continuing to be so, according to Chicago-based tracking group Hedge Fund Research (HFR).
Their benchmark Asian Index, the HFRI Emerging Markets: Asia ex-Japan Index, returned nearly 9% in the third quarter of this year, while assets in Asian hedge funds climbed to $73.7 billion, including $800 million of new capital, the first net inflow of capital since the economic crisis hit last year (see “Back on the move” ).
“While both emerging and developed Asia experienced performance increases and capital inflows, the performance based asset increases were concentrated in emerging Asia,” the group said in a statement. “The percentage of Asian-focused firms headquartered in China is 23.2%, reflecting an increase of nearly 5% since Q3 ’08 (see “Where is the home-grown talent,").”
ASIA-FOCUSED — BUT NOT ASIAN
Participants in the region, however, say that many of these Asia-based and Asia-focused entities are imports from abroad, rather than home-grown traders.
“The opportunities in Asia are amazing, but we are really just now beginning to see local Asian traders coming into the arena,” says Hong Kong native Chris Tam, a principal with Future Gate Investment Fund (see Trader Profile, July 2009). “Especially when you get into managed futures, as opposed to equities and options, the new business is really coming from abroad.”
Tom Weiye Tang agrees. He is a partner in Splendor Capital Management, one of the few CTAs based on Mainland China (see Trader Profile).
“There is a lot of interest in futures, but there aren’t that many from China,” he says. “I’d say most of the futures business that isn’t hedging is originating abroad.”
Countries like Korea and Japan continue to enjoy strong domestic trading, but most of the new professional volume is coming into the region from abroad, even in India, which leads the world in single-stock futures trading.
“We’re seeing more and more money managers coming up with an India focus, but they are not necessarily coming from India, or even located there,” says Saurav “Sunny” Arora, who in 2003 opened the Chicago office of Jaypee International, the firm’s operation in the Americas. “People can access Indian equity and equity derivatives markets if they are a registered participant, and many are taking advantage of that.”
But what about numbers showing a surge in Asia-based futures funds? Emmanuel Faure believes that reflects the growth of fund of funds based there rather than a surge in young
“On the managed futures side, everybody talks about this growth, and every securities or futures company has a managed futures department especially in Taiwan, but it’s usually a fund of funds investing into well-know CTAs,” says Faure, who is head of business development and sales for HSBC Futures Asia in Hong Kong and is heading up efforts to create a trade-execution infrastructure for hedge funds/CTAs there.
BOUTIQUES AND BEHEMOTHS
The expansion of options trading has spawned flocks of smaller boutique operations staffed by former market-makers now running intra-day option trades, and many of these are leading the demand for better connectivity, which in turn is laying the foundation for larger-scale algorithmic trading as the markets mature.
Faure says they’ve helped ratchet up volumes in the region but doesn’t include their activities as
“These are, by nature, smaller firms that don’t take a lot of overnight positions and very few are going to end up managing more than $100 million,” he says, adding that most of them are still staffed mainly by imports.
“The only place where you’re seeing local talent moving into what we’d call futures money management is Singapore, where old locals from the floor are becoming active on the screens and then trading the Japan, Singapore, Hong Kong and U.S. markets.”
Although few of those traders have yet established the kind of track records that attract international attention, the evolution towards futures can be seen in the HFR numbers, which show a shift towards relative value arbitrage and macro strategies and away from equity hedge. Indeed, the amount of money in relative value arbitrage now outweighs the amount of money in equity hedge by 17.6% to 11.7%, a reversal from just two years ago.
For now, the growing trend towards remote access will remain a key driver in the growth of Asia-focused managed money with the other key driver being Asia’s breakout performance of the
Nearly every Asian country now allows direct access to some degree, depending on the structure and history of the trading entity. Many require the formation of a local — and locally-regulated — branch office before granting direct market access, but others, like Japan, simply require a local registered representative for CTAs and other commercial entities that meet certain requirements. Some don’t require a local office, but offer tax breaks to companies that do open one. This all makes the decision about whether or not to go local a difficult one, dependent on anticipated volumes and other residual income benefits.
Each country is at a different stage in its opening-up, with some offering access to commodity markets but not to financials, and others taking the opposite route. Some offer collocation for algorithmic traders, but the algorithms themselves are usually subject to approval either by local authorities or by exchanges to prevent manipulative algorithms from getting into the system. Some countries, including Korea, don’t allow their currency to be traded abroad, which means trading firms will have to convert to local currencies and then enter costly on-shore hedging arrangements to reduce currency risk.
That means clearing firms like Newedge, HSBC, and Jaypee will have to compete not only by providing access, clearing, and consolidated statements, but by providing education, says Arora.
“Markets are the same wherever you go, because it’s the same forces driving them,” he says. “What traders need to know is the nitty-gritty of what it’s going to cost them to access this market or that one, and how we can make it easier for them.”
He says many CTAs are unfamiliar with the various regulatory regimes in which they will be trading, each of which has its own rules for permissible order types, access, taxation,
Faure says that HSBC Futures has ratcheted up its targeting of hedge funds/CTA business this year, in part by restructuring its Asian trading desks along product lines. He recommends traders new to Asia identify one or two markets where they want direct market access, and use trading desks for the others.
“You’ll always find you understand some markets better than others, or that some markets just fit your trading style,” he says. “Once you do that, we can set you up with direct market access for the exchanges you want to trade regularly, but offer you the trading desk for other markets.”
TOMORROW’S ASIAN TALENT
Most of the participants we spoke to expect a wave of home-grown talent to fill the new trading infrastructure that is taking shape, but it won’t necessarily come from the banks and other financial service providers setting up shop there.
Nora Lieu is studying agricultural economics at Northeast Agricultural University in Harbin, China, and expects a wave of new Asian trading talent to come out of the cash markets and other left-field sources, the way it tended to do in the United States, rather than out of banks, as it has primarily come from in Europe.
“You go out to the countryside, and what you find are guys who have been trading cash markets all their lives, and they are getting into futures now,” she says. “You have a combination of people who don’t really have a clue, and then you have people who are really smart, but completely self-taught and street-smart, and these are the guys who are just now starting to get it as far as futures are concerned.”
“It’s a stereotype, but it’s true,” says Arora, who himself segued into futures because of a passion for the markets. “Many Asians are mathematically inclined, and we’re born risk-takers, which is why you see Indians and Chinese on the trading floors of top banks in New York.”
And, he believes, it will soon be that way in the pages of this magazine.