Monday, December 8, 2008
Citadel Scales Back Asian Operations
HONG KONG -- Citadel Investment Group became the latest major hedge fund to pull back from Asia, as a sharp market slump diminishes the appeal of a region once seen as a promising source of growth. Chicago-based Citadel said it was closing its Tokyo office, laying off 12 employees there. It will also cut 25 jobs in its Hong Kong office, representing nearly half of its employees there. Citadel also said it will deal more in foreign exchange, derivatives and possibly other transactions. Previously, it had pursued an investment strategy that resembled that of many private-equity firms, in which it invested in small companies with sound prospects, often hoping to cash out in an initial public offering. But the IPO market has dried up as Asia's stock markets have fallen. The firm will "focus on the greatest potential opportunities and scale back where the opportunity set is no longer as attractive," a spokeswoman said. The retreat follows a similar scaling back by other big Western hedge funds. Last month, Ramius LLC, a New York-based hedge fund with about $11 billion under management, eliminated a staff of about a dozen people in Hong Kong focused on trading of equities, convertible bonds and other securities. Also last month, Blackstone Group LP lowered its sights for a new Asia-focused hedge fund, cutting the size to about $200 million from earlier plans of between $500 million and $1 billion. Many of the region's funds, including Citadel, established a presence in Asia only in the last few years. They often depended on taking direct equity stakes in regional companies. But many hedge funds didn't adequately protect themselves through short-sale bets or derivatives contracts, as tighter regulations and smaller public floats in many Asian markets make such moves cumbersome. The Eurekahedge Asian index, which doesn't include Japan, is down 21.7% through November, while its global index has lost just 12.3%. Hedge-fund managers, prime brokers and consultants say that pressures on their business globally are forcing them to pare back operations in Asia. "Every single manager is getting redeemed this year, whether they are up or down," said one manager. As investors world-wide yank money from hedge funds, managers are rushing to raise cash and reduce unnecessary overhead. "This is part of the classic Asian cycle," said Peter Douglas, a Singapore-based independent consultant to hedge funds. "Always at the top of the cycle, a lot of international firms come in. Then the cycle turns, and people pick up their ball and go home." For Asian corporations, the cutbacks by hedge funds represent the loss of a potential source of capital. Western hedge funds with traders and analysts on the ground often forged privately negotiated deals with publicly traded companies. The deals allowed large hedge funds such as Citadel to deploy capital in fast-growing companies that the funds believe had solid growth prospects. Many of these companies had small public floats and were thinly traded. In return for the cash from hedge funds, the companies often agreed to provide the funds with a seat on the board and some influence over decision-making. For Citadel, the move comes amid stinging losses for the once high-flier. According to investors, Citadel lost 13% globally in November, contributing to a 47% decline so far this year.