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World's biggest hedge fund returns are found in Singapore
[SINGAPORE] On most mornings, Chong Chin Eai starts his day with a jog through Singapore's Botanic Gardens. After taking his son to school, he trades futures on his laptop at home until it's time for lunch, after which he might have a massage or perhaps a nap.
If that sounds snoozy, Mr Chong's returns are anything but. His Vanda Global Fund, started with US$24 million from friends and family and named after Singapore's national orchid, is the world's best-performing hedge fund this year, gaining more than 300 per cent.
Singapore is far from the skyscrapers of New York and The City of London, yet somehow it's producing hedge funds that are trouncing global rivals. The city-state is home to two of the top 10 in 2019, and a third is partly based in the island nation. In all of the US, there are only four, and zero in Europe or Hong Kong.
Their individual successes come at a time when many investors are questioning the wisdom of pouring large amounts of money into hedge funds because of their high fees and mediocre returns. Global outflows total US$88 billion so far this year, more than double 2018, eVestment data show.
Hedge funds in Singapore are also shining as a group, generating an average return of 9.4 per cent for clients in 2019, according to Eurekahedge. That beats the 7.6 per cent return for Asia and 6 per cent return for Europe. The Eurekahedge North American Hedge Fund Index is up 7.6 per cent this year.
So why are they winning?
CRAZY RISK TAKERS
There are three key theories behind the success of Singapore's chart-toppers.
The first is that the region's crazy rich Asians are also crazy big risk takers, willing to plunge millions into funds that can have massive volatility.
On a per capita basis, Singapore is one of the wealthiest nations on Earth, and it has an outsized wealth management sector.
The relatively small size of its hedge fund industry - assets under management of US$47.3 billion pale in comparison to US$1.6 trillion in North America and US$462.7 billion in Europe - may also mean investors in the more petite funds are more comfortable with risk versus their peers, often venerable pension and sovereign wealth funds that demand lower volatility even if that means less profit.
"There's a lot of money coming in - money that's willing to take more risks," said Johan Sulaeman, who teaches finance and investing at the NUS Business School in Singapore.
Mr Chong's Vanda is a poster child of this phenomenon.
His storied rivals would have teams of portfolio managers, squads of analysts and a small army of interns. Mr Chong, 46, trades from a plain desk in his home office with a laptop and an extra monitor. While some quants have supercomputers, his model is built on an Excel spreadsheet that crunches data supplied by a Bloomberg terminal.
"If you spend too much money in terms of infrastructure and rent, it'll eat into your returns," Mr Chong said in an interview in a nearby cafe. "I only have two eyes, right, so how many screens can I look at?"
Even though his fund's annualized volatility is a whopping 72 per cent - it returned 260 per cent in 2017 only to plunge 49 per cent the following year - early backers have remained loyal. Vanda's annualised returns are 39 per cent and Mr Chong now manages US$222 million. He's been taking steps to reduce volatility, to 40 per cent, while still aiming to generate growth in excess of 30 per cent a year.
It's not just minnows that are taking risks.
Singapore's Quantedge Capital, whose 63.1 per cent return this year makes it one of the world's best quant funds, manages over US$2.1 billion and has almost 70 staff and more than 600 clients. It targets annualised volatility of about 30 per cent, far higher than what many larger funds with institutional investors are willing to stomach.
SCHOOL OF THOUGHT
The second thesis is that the relative illiquidity of Singapore's stock exchange and lack of natural resources have combined with its high-pressure education system to produce smart, data-driven graduates who think globally. Almost half the country's hedge funds have a global geographic mandate.
"The Singapore stock market itself is not a very liquid vehicle for these hedge funds so they've been forced to look globally and they've been conditioned to be international players," Mr Sulaeman said. People in Singapore have "also been educated in such a way that they're very familiar with quantitative techniques and tools."
Norman Tang, whose PruLev Global Macro Fund is also in the top 10, more than doubled his clients' money this year and hit assets under management of US$300 million, thanks in no small part to lucrative bets on Treasury futures. He said Singapore's global investment outlook has attracted brokers from around the world.
"The ecosystem for futures trading is very well developed here," Mr Tang said. "The brokers who offer SGX trading tend to also offer futures trading. If you want to trade the Australian, US or Canadian markets, many brokers here can offer it."
The least-charitable theory is that the top-performing Singapore funds adopted similar strategies and just got lucky.
Contrary to many expectations, key parts of the global economy fared well in 2019; the S&P 500 is up 26 per cent since January. Had you made bullish, leveraged bets in the first half you would have earned substantial returns - something Vanda, PruLev and Quantedge all managed to pull off as global macro funds.
Another figure supports the luck argument, too. The value of assets under management among Singapore's hedge funds is still lower than its 2017 peak and plenty of failed and money-losing firms dot the landscape; if there's something in the water, not everyone is drinking.
Even Vanda's Chong says 2019 was likely an anomaly, warning clients not to expect such returns every year. He doesn't rely on good fortune for his gains. Often his day won't end until well after midnight as he trades the US markets.
Regardless, the relatively long and positive track record of players like PruLev (seven years) and Quantedge (13 years) has served as a beacon for would-be money managers.
In mid-2019, Quantedge was swamped by thousands of pedigreed candidates applying for just 30 internships, unimaginable a decade ago.
"Throughout our history many people didn't give us a chance," Quantedge chief executive officer Suhaimi Zainul-Abidin said.
While reducing volatility - and returns - would probably attract more investors, Quantedge has chosen to stay the course.
"These are tough decisions and it's harder to run a business this way, but it's been the right call," Mr Zainul-Abidin said.