Betting on the gradual liberalization of regulatory and corporate standards of the Eastern world appears on first glance to be an unusual and risky thesis on which to base a hedge fund strategy. One only needs to think what just happened to fund managers who were believing in Argentine reforms.
But that strategy is exactly what Simon Sadler was focused on when he set up his Hong Kong-based firm Segantii Capital Management Ltd. — and his $3.5 billion Segantii Asia-Pacific Equity Multi-Strategy Fund — a dozen years ago in the eye of the financial crisis.
It took several years for many managers to make up for what they had lost during the Great Recession. Mr. Sadler, Segantii's founder and chief investment officer, suffered no such drawdown, according to data from Eurekahedge Pte. Ltd., gaining instead 24% over his first 13 months through 2008, then adding 18% in 2009.
It raises the question: How did a fund geared to a long-term vision outsmart the short-term punch of the global financial crisis?
Mr. Sadler said he also was keenly aware of the short-term pricing inefficiencies across much of the Asian-Pacific region because local markets are often dominated by mercurial retail investors, fluctuating liquidity and restricted capital flows. And he has repeatedly taken advantage of such mispricing opportunities, especially during sharp bouts of turbulence.
In 2011, when the eurozone sovereign debt and banking crisis reverberated globally and the Fukushima Daiichi nuclear power plant was melting down, the fund generated its largest annual gains — up nearly 41%, according to Eurekahedge. And when the bottom fell out of the markets in the fourth quarter of 2018, the fund realized more than half its 11.34% gain for the year.
While observers may see the current Hong Kong demonstrations as a driver of volatility, Segantii views this turmoil far more cautiously, increasing hedges against potential fallout. Accordingly, Segantii CEO Kurt Ersoy said the fund has reduced net exposure, increased liquidity, and added futures and options hedges to provide additional crash protection.
One clear rub is if rising tensions and fears dries up trading activity.
Segantii struggles when active markets and volatility dissipate. Simply put, it's harder to make money when markets stall. That occurred in the second half of 2013 through the first quarter of 2014 as foreign institutional investors withdrew money from the region.
Fortunately for Segantii, there have been few such extended periods of such passivity. The fund's overall results have impressed Dan Parker, deputy chief investment officer of the Texas Tech University System's endowment, which has a chunk of its $1.3 billion portfolio with Segantii. Mr. Parker declined to disclose the size of Texas Tech's investment in the fund.
Mr. Parker regards the fund "as a rare find — a true absolute-return fund that has delivered positive returns through multiple significant market drawdowns, while also producing positive returns when markets are rallying."
That echoes the sentiment of a venerable Zurich-based institutional investor, which has been invested in Segantii since the fund's launch. Wishing to remain anonymous, the Swiss asset manager's global head of hedge fund investment due diligence said: "Segantii offers us unique, idiosyncratic exposure that's been consistently producing an impressive risk-return profile we've seen no place else."
Overall, about 60% of Segantii's investors are institutional. About 74% of those investors are based in North America, with 20% in Europe and 6% in Asia-Pacific.