Barron's Cover

SATURDAY, NOVEMBER 12, 2011

Enter the Yuan

By KOPIN TAN

By the end of the decade, China wants to establish the yuan as a reserve currency that could someday challenge the almighty buck.



The U.S. dollar is the currency of the world, but that dominance could begin to erode if China has its way. It won't happen right away, but by the end of the decade, the yuan could join the buck and the euro as one of the world's reserve, or anchor, currencies.

Nearly three of every four of our hundred-dollar bills circulate abroad. Oil, copper and almost every other internationally traded commodity is denominated in dollars. The vaults at foreign banks and governments are stuffed with greenbacks. Sixty percent of the planet's foreign-exchange reserves are made up of U.S. dollars, far more than 27% for the euro and 4% for the yen.

But with the dollar depreciating and the euro imploding, China is seizing the opportunity to encourage other countries to use its currency as a medium for trading and investments, as well as a store of value. It's a big leap forward since the yuan -- also called renminbi, which translates literally into "the people's money" -- is tightly controlled and isn't freely convertible into other currencies.

In recent years, China has stepped up an ambitious plan to increase the circulation of yuan outside the mainland and persuade trading partners to use it to invoice or settle transactions. And it is aggressively building a market for yuan-denominated debt. In the past year, McDonald's (ticker: MCD) as well as Caterpillar (CAT) and Unilever (UN) have all raised money by issuing yuan-denominated debt in Hong Kong. And that's just a start.

If all goes according to plan, the yuan could become one of the world's reserve currencies as soon as 2015 -- a daunting deadline, given the political and economic challenges of making the yuan freely convertible. Morelikely, it will become an alternate reserve to the buck and the euro around 2020 -- the target China has set for Shanghai to join New York and London as a global financial hub.

This being China, everything must happen at Beijing's pace. The yuan cannot become a credible reserve until Beijing relinquishes its rigid control of the exchange rate and allows capital to flow freely in and out of the country. Yet in the short term, China can't afford for that to happen until it has successfully implemented its five-year plan to shift its export-reliant economy toward domestic consumption and services. Allowing the currency to rise too quickly would hurt the competitiveness of its still-powerful manufacturers.

But over the long haul, internationalizing the yuan plays into Beijing's grand plan. "The last three years have made it clear to China that it can't sustain a growth model that's overly dependent on U.S. or European consumers," says Stephen Roach, non-executive chairman of Morgan Stanley Asia. "This has given China a number of imperatives, one of which is to stay the course of gradual currency appreciation and internationalization."

The yuan has gained 30% against the dollar since 2005, when China allowed it to float within a controlled range against a basket of currencies. But most strategists believe it's still undervalued by 30% against the greenback. That means each yuan might be worth more than 20 U.S. cents, instead of the 15.75 cents suggested by today's exchange rate.

The path toward a truly free-market economy is by no means straightforward. China is a monolithic culture with competing political forces. Within the country, there are fierce debates about the chasm between rich and poor and policy arguments as to how fast China should move toward liberalizing its currency. While China's economy is second only to America's, per capita GDP is just $4,382 -- 91st in the world.

yaun_bar_cht2

LIBERALIZING THE YUAN eventually and letting it appreciate will help with two of Beijing's most pressing priorities -- controlling inflation and giving its vast middle class more buying power.

In many ways, the yuan is a modern Chinese paradox. The world's fourth-biggest country in geographic size already has the planet's biggest population, at 1.34 billion. And it has the world's second-biggest trading volume. China's gross domestic product surged to nearly $5.9 trillion last year, from $390 billion in 1990, and is projected to surpass that of the U.S. between 2025 and 2030. Yet its currency remains diminutive on the global stage. Mao Zedong, whose face adorns China's bank notes, doesn't get around nearly as much as Benjamin Franklin.

Beijing would like that to change. China's official forex reserves topped US$3.2 trillion this summer.

By 2015, in Deutsche Bank's estimate, China could end up with a third of all publicly held U.S. Treasuries. In fact, China's stash of foreign reserves relative to domestic money stock is more than 10 times that of the U.S. RBS estimates that the People's Bank of China can easily print 10 times more yuan without having to accumulate any more reserves to back them up.

Our biggest creditor has grown uncomfortable with America's wanton indebtedness, not to mention the threats made during this summer's debt-ceiling debacle to default on our obligations. It's no coincidence that China has grown more vocal about its ambition to establish its own anchor currency, and president Hu Jintao has repeatedly called a dollar-dominated currency regime "a product of the past."

THE GREENBACK REMAINS the world's dominant reserve currency partly because of inertia. Our economic heft, transparent government and well-established rule of law have persuaded generations of foreigners to hold the buck as a store of value. Old habits die hard. It took decades after the U.S. economy surpassed Britain's for the buck to supplant the pound sterling as the world's "go to" money.

In recent years, however, the dollar has clung to its exalted status "not so much because of its quality, but because of its liquidity," says Axel Merk, president of Merk Investments and manager of its various currency mutual funds. "One advantage of issuing so much debt is you end up with a deep, liquid market."
Having a market that investors can easily buy in and out of has many advantages:

Investors, banks, governments are more willing to hold your currency and bonds.

You can practically print money to buy foreign assets, and investors essentially extend to you an interest-free loan.

You can issue debt to finance myriad investments.

Your financial markets end up deeper than they might be otherwise, which makes your banks more competitive.


And, conducting overseas trade in your own currency avoids risks that come with fluctuating exchange rates, giving your companies greater bargaining power.

None of these attractions are lost on Chinese bankers and businesses, and Beijing sees plenty of room to grow. For example, just 8.6% of China's trade was settled using the yuan in the first half of this year. That's already a big jump from 0.7% in the first half of 2010, but pales compared to levels exceeding 50% for the euro zone and 80% for the U.S. Not surprisingly, China is steering trade partners toward the yuan.

China's trade is increasingly conducted with emerging markets, but the transactions are invoiced neither in the yuan nor those countries' own currencies. That will change. Smaller countries have greater incentives to appease a dominant, fast-growing trading partner, and diversify some of their reserves beyond the weakening dollar or euro.

Beijing also is tweaking tax policies, and multinational banks eager for a piece of the cross-border yuan trade have quickly launched a global clearing system. HSBC estimates, for example, that half of China's trades with emerging markets will be settled in the yuan within three to five years, up from less than 3% now.

UNLIKE JAPAN, Switzerland or the U.K., China has the economic heft and momentum to propel the yuan to reserve status. But first it will need to make the yuan convertible, create deep and liquid domestic bond markets, and improve the rule of law, says Markus Jaeger, a director of global risk analysis at Deutsche Bank.

The World in 2030

China's population will be even huger than it is now, and its gross domestic product and government-bond markets could catch up to those of America and Europe.

U.S. (2009) U.S. (2030) Euro Zone(2009) Euro Zone(2030) China (2009) China (2030)
Population (in mil) 309 369 321 289 1,337 1,462
GDP (in US$ tril) $14.3 35.3 12.5 23.6 4.9 39.4
Merchandise Trade (in US$ tril) $2.7 6.6 3.1 4.7 2.2 17.7
Govt Bond Market (in US$ tril) $9.2 28.3 8 18.9 1.4 19.7
Rule of Law score* 1.7 NA 1.7 NA -0.3 ?

*Score using Germany as proxy Sources: Deutsche Bank Research, UN, EU, IMF, World Bank .

Despite some improvement, the notion that law should apply fairly and efficiently to everyone is still lacking in China. And China's bond market is still small and illiquid, and its currency is controlled with an iron fist. Try emptying your pockets of loose change in any Beijing hotel to be converted into the yuan, and the poor desk clerk has to write down the serial number of each dollar exchanged; such is Beijing's currency control.

But China is speeding up the yuan's internationalization:

In July 2009, it selected five coastal cities -- Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan -- where trade with Hong Kong, Macau or certain Southeast Asian countries could be settled using the yuan. Less than a year later, that pilot scheme was swiftly broadened to 20 cities, and their cross-border trades with all foreign partners.

Beijing has allowed foreign central banks, starting with Malaysia, to hold yuan reserves, and it has inked swap lines to boost bilateral trade and investments with neighbors like Singapore and Korea, and with countries as far away as Argentina, Belarus and Iceland. Following a visit by vice premier Li Keqiang to Hong Kong this summer, the Commerce Ministry has eased rules for yuan-based foreign direct investments. Beijing has also liberalized rules to allow Chinese importers to pay overseas trading partners in yuan and allow eligible exporters -- more than 67,000 at last count -- to receive payments in yuan.

In a controlled experiment, China has established Hong Kong as an offshore hub for trading the yuan, a market denoted by the symbol "CNH," which stands literally for "Chinese yuan deliverable in Hong Kong." Having two markets for one currency -- one offshore and one onshore -- is an artificial by-product of Beijing's need to restrict the flow of yuan in and out of the mainland, but it's a step toward letting the yuan trade freely one day. Yuan deposits in Hong Kong have jumped to nearly 600 billion in June from less than 100 billion a year ago, according to the Hong Kong Monetary Authority.

With such clamor, Chinese Vice Premier Wang Qishan held talks this September with U.K. officials about developing another offshore hub, this time in London. This could, crucially, pave the way for the yuan to be traded outside Asia business hours. How long before the yuan can be traded round the clock? "This is still not the same as making the yuan fully convertible," notes RBS strategist Woon Khien Chia. "But it's pretty much the very last step toward full convertibility."

Beijing also is aggressively establishing Hong Kong as a market for bonds denominated in offshore yuan, which has been nicknamed the "dim sum bond market." The China Development Bank issued the first such bonds in 2007, but the market took off last year after regulatory limits were eased.

In addition to McDonald's, Caterpillar and Unilever, Volkswagen (VOW.Germany), UBS (UBS) and the World Bank have raised money by issuing debt here. The market is small but growing fast, swelling to 135 billion yuan from 55.8 billion yuan over the past 10 months, while the number of issuers jumped to 84 from 18, notes BofA Merrill Lynch, which has launched an index to track this burgeoning niche. Firms like Guggenheim, PowerShares and Van Eck quickly unleashed dim-sum-bond exchange-traded funds (bearing the respective tickers RMB, DSUM and CHLC).

YUAN_chart3

.
What might speed up Beijing's path to currency liberalization? "More episodes like the debt-ceiling fiasco, which could cause foreigners to lose faith in our ability to put our fiscal house in order, will encourage them to look for alternatives," says Barry Eichengreen, a professor of economics and political science at the University of California Berkeley and author of Exorbitant Privilege, about the dollar and the international monetary system.

The dollar most likely will remain the dominant reserve for decades. For all our fretting, America has
been a debtor nation and China a creditor for years. For foreign institutions to abandon the dollar, they must believe the U.S. will default on its debt. And most Americans still believe -- or hope -- that such a disaster can be averted, even as our congressional "super committee" gropes for ways to cut $1.2 trillion from our deficit over the next decade. Still, foreign central banks and investors are watching the squabbling on Capitol Hill with the intensity of hawks browsing for mice.

What's the price of our failure? The dollar's share of global forex reserves has shrunk by roughly one percentage point a year since the credit bubble burst in 2008, and continued erosion will eventually hurt our already diminished purchasing power. Imports -- from French brie to Korean flat-screen TVs -- will cost more.

"The U.S. government has been able to finance our deficit for less than it might cost because we manage to sell lots of Treasuries," Eichengreen adds. "But if foreigners become less willing to buy, we'll soon lose that ability." Americans may even have to starting saving more to finance our own economic growth. "Relying on the savings of foreigners willing to lend to us at favorable rates isn't going to cut it anymore," Roach says. "The Chinese have made it clear that those days are numbered."
.Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved

Down with the Eurozone

Nouriel Roubini 

2011-11-11




NEW YORK – The eurozone crisis seems to be reaching its climax, with Greece on the verge of default and an inglorious exit from the monetary union, and now Italy on the verge of losing market access. But the eurozone's problems are much deeper. They are structural, and they severely affect at least four other economies: Ireland, Portugal, Cyprus, and Spain.

For the last decade, the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) were the eurozone's consumers of first and last resort, spending more than their income and running ever-larger current-account deficits. Meanwhile, the eurozone core (Germany, the Netherlands, Austria, and France) comprised the producers of first and last resort, spending below their incomes and running ever-larger current-account surpluses.

These external imbalances were also driven by the euro’s strength since 2002, and by the divergence in real exchange rates and competitiveness within the eurozone. Unit labor costs fell in Germany and other parts of the core (as wage growth lagged that of productivity), leading to a real depreciation and rising current-account surpluses, while the reverse occurred in the PIIGS (and Cyprus), leading to real appreciation and widening current-account deficits. In Ireland and Spain, private savings collapsed, and a housing bubble fueled excessive consumption, while in Greece, Portugal, Cyprus, and Italy, it was excessive fiscal deficits that exacerbated external imbalances.

The resulting build-up of private and public debt in over-spending countries became unmanageable when housing bubbles burst (Ireland and Spain) and current-account deficits, fiscal gaps, or both became unsustainable throughout the eurozone's periphery. Moreover, the peripheral countries’ large current-account deficits, fueled as they were by excessive consumption, were accompanied by economic stagnation and loss of competitiveness.

So, now what?

Symmetrical reflation is the best option for restoring growth and competitiveness on the eurozone's periphery while undertaking necessary austerity measures and structural reforms. This implies significant easing of monetary policy by the European Central Bank; provision of unlimited lender-of-last-resort support to illiquid but potentially solvent economies; a sharp depreciation of the euro, which would turn current-account deficits into surpluses; and fiscal stimulus in the core if the periphery is forced into austerity.

Unfortunately, Germany and the ECB oppose this option, owing to the prospect of a temporary dose of modestly higher inflation in the core relative to the periphery.

The bitter medicine that Germany and the ECB want to impose on the periphery – the second option – is recessionary deflation: fiscal austerity, structural reforms to boost productivity growth and reduce unit labor costs, and real depreciation via price adjustment, as opposed to nominal exchange-rate adjustment.

The problems with this option are many. Fiscal austerity, while necessary, means a deeper recession in the short term. Even structural reform reduces output in the short run, because it requires firing workers, shutting down money-losing firms, and gradually reallocating labor and capital to emerging new industries. So, to prevent a spiral of ever-deepening recession, the periphery needs real depreciation to improve its external deficit. But even if prices and wages were to fall by 30% over the next few years (which would most likely be socially and politically unsustainable), the real value of debt would increase sharply, worsening the insolvency of governments and private debtors.

In short, the eurozone's periphery is now subject to the paradox of thrift: increasing savings too much, too fast leads to renewed recession and makes debts even more unsustainable. And that paradox is now affecting even the core.

If the peripheral countries remain mired in a deflationary trap of high debt, falling output, weak competitiveness, and structural external deficits, eventually they will be tempted by a third option: default and exit from the eurozone. This would enable them to revive economic growth and competitiveness through a depreciation of new national currencies.

Of course, such a disorderly eurozone break-up would be as severe a shock as the collapse of Lehman Brothers in 2008, if not worse. Avoiding it would compel the eurozone's core economies to embrace the fourth and final option: bribing the periphery to remain in a low-growth uncompetitive state. This would require accepting massive losses on public and private debt, as well as enormous transfer payments that boost the periphery’s income while its output stagnates.

Italy has done something similar for decades, with its northern regions subsidizing the poorer Mezzogiorno. But such permanent fiscal transfers are politically impossible in the eurozone, where Germans are Germans and Greeks are Greeks.

That also means that Germany and the ECB have less power than they seem to believe. Unless they abandon asymmetric adjustment (recessionary deflation), which concentrates all of the pain in the periphery, in favor of a more symmetrical approach (austerity and structural reforms on the periphery, combined with eurozone-wide reflation), the monetary union's slow-developing train wreck will accelerate as peripheral countries default and exit.

The recent chaos in Greece and Italy may be the first step in this process. Clearly, the eurozone’s muddle-through approach no longer works. Unless the eurozone moves toward greater economic, fiscal, and political integration (on a path consistent with short-term restoration of growth, competitiveness, and debt sustainability, which are needed to resolve unsustainable debt and reduce chronic fiscal and external deficits), recessionary deflation will certainly lead to a disorderly break-up.

With Italy too big to fail, too big to save, and now at the point of no return, the endgame for the eurozone has begun. Sequential, coercive restructurings of debt will come first, and then exits from the monetary union that will eventually lead to the eurozone’s disintegration.
.
Nouriel Roubini is Chairman of Roubini Global Economics, Professor of Economics at the Stern School of Business, New York University, and co-author of the book Crisis Economics.


Hedge funds in Asia

The crocodiles are coming

Hedge funds see Asia as a new centre for their business. But they will have to work hard to make it so

Oct 29th 2011 | HONG KONG
.


ERIC WONG, who helps run his Hong Kong family’s money through an investment office, TCG Capital, looks like a hedge-fund manager’s dream. He’s rich, young and, having been to university there, comfortable with American ways—just the type of investor that Western hedge funds looking for Asian expansion have set their sights on. He is not, however, very interested. Real estate is the “best pension plan my family ever had,” he says. Why change?

Where they are not greeted with apathy, Asia-minded hedge funds often face antipathy. Since the financial crisis of the late 1990sfund” has been a four-letter word throughout Asia. George Soros, a famous hedge-fund investor, is still reviled for aggravating and profiting from the crisis. When the Chinese refer to hedge funds as ju e, or “big crocodiles”, it is not by way of a compliment on their killer instincts.

Ravenous growth and maturing equity and credit markets should mean Asia offers a lot of opportunities. “Our investable universe has doubled in the last five years,” says one happy executive at a fund that recently launched in Hong Kong. At the same time there is little by way of an asset-management industry in much of Asia. Investors’ portfolios mostly consist of just property and stocks, which leaves lots of room for hedge funds’ offerings. And there are vast numbers of millionaires to whom such offers can be made.

If the hedge funds succeed they could help spur Asian capital markets to grow bigger and more versatile. Few parties have more of an interest than they in seeing Asian markets become more liquid and more complex, since trading is how they make their livelihood. A wider range of financial products could in time also prove a boon for Asian pension funds and others taking stock of the issues raised by the ageing population’s future needs. But building the industry up will not be an easy task; it will take new local knowledge, new approaches to investing and new levels of performance.

Getting beyond the graveyard

It is not as if hedge funds had previously ignored Asia. They have just done poorly there. “Asia is a hedge-fund graveyard,” one executive says matter-of-factly. Another corpse is about to be buried: Perry Capital, a big American hedge fund, recently announced plans to close its Hong Kong office.

Assets in Asia-focused hedge funds now stand at $130 billion, well below their 2007 peak (see chart 1), and account for less than 8% of the $1.8 trillion invested in hedge funds globally. They saw just $11 billion of net inflows in the past 12 months. The number of funds, once soaring, has in the past few years merely held steady.

New attempts to buck this trend come not just from an appreciation of Asia’s promise. The lack of promise elsewhere plays a big part, too. Hedge funds have suffered some stormy years in their traditional stomping grounds of New York, Greenwich and London. Having once guaranteed investorsabsolute returns”, or performance regardless of the market conditions, their returns over the past three years have been mixed and often dismal. Finding American and European investors willing to pay high fees and write big cheques is hard.

So new managers are arriving in Hong Kong and Singapore each week to seek out prospective clients and preach the importance of portfolio diversification. And since the start of 2010 many funds have been opening offices in Asia, including giants like Moore Capital, GLG and Paulson & Co. A slew of new funds has also launched in Hong Kong and Singapore. In April Azentus Capital, a Hong Kong hedge fund, was able to raise over $1 billion in Asia’s largest-ever hedge-fund launch. Bill Lu, president of Hong Kong-based hedge fund Ortus Capital and former head of hedge-fund investing for China’s sovereign-wealth fund, CIC, expects the assets funnelled to hedge funds in Asia to double in five years.

This is in part because Asian governments have recently been more supportive of the funds. Earlier this year Shanghai’s government sent a delegation of people to Connecticut to study how Greenwich became a hedge-fund mecca, a trick the city would like to pull off itself one day. Hong Kong and Singapore are keen to become hedge-fund capitals to rival New York and London, and are working hard to craft regulatory regimes that will help. They require hedge funds to register, but aren’t as demanding as America and Europe, which have passed new rules that increase the cost of starting and running funds. And income-tax rates for high earners in Hong Kong (17%) and Singapore (20%) are much lower than in Britain (50%). That’s a powerful argument to a footloose trader.

The enthusiasm is not just in market-oriented cities. South Korea recently changed rules to allow onshore hedge funds for the first time. Asian sovereign-wealth funds, including not just Singapore’s GIC and Temasek but also China’s CIC, have in the past couple of years started to funnel money into hedge funds.

What’s in a name?

Despite some signs of government enthusiasm, both the Western hedge funds making inroads in Asia and the native funds sprouting up there face markets that are tricky to navigate. Each Asian country has different regulations. Whereas Europe has its UCITS funds, accepted in all EU countries, there is no pan-Asian marketing vehicle for hedge-fund managers. Taiwan doesn’t allow offshore hedge funds to invest there, or to market themselves. The sixth-largest equity market in the world, Shanghai is at present mostly off-limits to investors outside mainland China, though optimists predict some restrictions will ease in the next few years.

Then there’s the bad reputation. Investors may be willing to sit down with crocodiles and hear their pitch, but they are often not eager to invest afterwards. Many, like Mr Wong, don’t see why they should pay a manager high fees (usually 2% of assets and 20% of profits) when they have been handling their own money pretty successfully. It doesn’t help that many big Western hedge funds are accustomed to asking for tens of millions of dollars at a time. Asia’s wealthy like to start with a small allocation to test the waters. And the waters they prefer to test may be those of private-equity firms, with which entrepreneurs who made their fortune building companies are often more comfortable. KKR, an American buy-out firm, has plans to raise a $6 billion Asian fund, an amount the crocodiles would kill for.

The rocky track record of some iconic hedge funds has further troubled potential investors, says Daniel Jim of Tripod Management, which advises Hong Kong investors on hedge funds. Those who invested in hedge funds before 2008 recall bitterly how some of themgatedinvestors, refusing to let them take out their money. One manager had the chutzpah to come back to Hong Kong recently and ask a client with money still locked up in his fund for more. The investor went to his office, got the fund’s legal documents and threw them at him.

Some hedgies try to dodge these negative associations. “We try not to emphasise in presentations that we’re a hedge fund,” says Jimmy Chan, the boss of Value Partners, a publicly listed hedge fund and long-only manager. Yang Liu of Atlantis Investment Management, a $4 billion fund that reportedly counts bigwigs like the Bill and Melinda Gates Foundation among its investors, insists she offersabsolute-return products” and “not really hedge funds”.

Another risk for foreigners is how well they know the countries and companies they’re invested in. Take, for example, John Paulson, the hedge-fund guru who made billions of dollars predicting America’s housing crisis. Recently he faced losses to the tune of $500m after a short-seller alleged that a company Mr Paulson invested in, Sino-Forest, didn’t have the timber stocks it claimed: its shares tanked before the Toronto stock exchange, on which it was listed, suspended trading in it. Yet an outside eye can sometimes see things that locals can’t or won’t. Sniffing out fraud and shorting its perpetrators has been a nice earner for Asia’s hedge funds.

For home-grown hedge funds the big problem is not being wrong: it is being small. Around 41% of funds in Asia manage $20m or less, and only 2% manage more than $1 billion, according to Eurekahedge, a research firm.
This means they are going to be less attractive to sovereign-wealth funds and big institutions, which write large cheques, do not want to be too much of a fund’s investor-base and are often expressly looking for exposure outside Asia.

That makes foreign investors wanting some Asian growth an attractive prospect for small funds keen to grow. But in the aftermath of the Madoff scandal many investors are loth to put their money with any fund that does not have rigorous (read: costly) compliance and reporting schemes. And hedge funds are not in principle the place for bullish bets on Asian growth. In a bull market hedges should diminish returns. Paul Smith of TripleA Partners, which advises foreigners on investing in Asian funds, says there is twice as much money looking for long-only funds as for hedge funds.


For that minority which wants the security that hedging offers, the Asian hedge-fund record is still not compelling. They tend to tank when the markets fall (see chart 2). Asian funds are more invested in equities than hedge funds in general, and they take long positions more than short ones—hence the correlation. Since investors in search of an equity roller-coaster ride can buy index-tracking products a lot cheaper, hedge-fund managers need to demonstrate their investment skill better, and offer strategies besides just going long or short on equities. Funds are trying to distinguish themselves by focusing on countries (Japan and China) or instruments (emerging-market currencies).

Many managers have learned lessons from the trauma of the past few downturns and tried to devise ways to cope with the volatility of Asian markets. “If you manage money in Asia, you ought to expect the market to go down 50% every 3-4 years,” says John Ho, the founder of Janchor Partners, a large hedge fund.

Investors in Janchor have agreed to lock up their capital for longer, around 2.6 years on average—an eternity in hedge-fund land. This means Mr Ho won’t have to worry about investors running for the exit the next time the market goes down. But until such approaches have a track record of success investors may stay skittish.

The Orient express

Enthusiasts think eventual success for the hedge funds would bring wider benefits. In moving away from equities towards corporate bonds, currencies and new derivatives the funds should add to the liquidity and sophistication of Asian markets. Raising capital will be easier and cheaper when there are more hedge funds hungry for debt or equity. Hedge funds sniffing out fraud will be good for other investors, too.

And then there are changes in the markets which could alter the prospects for hedge funds. Recent signs pointing to trouble in the Asian equity and property markets could move investor sentiment their way. A serious slowdown could show wealthy Asians the merits of putting money into assets other than just equities and property. According to one hedge-fund executive, “I think a slowdown in Asia could be the best thing to happen to hedge funds here.” For that to pay off, though, the funds will have to ride out the falls in asset prices well. Asia may yet come to love its crocodiles. But they will have to show that they can swim in choppy waters.