COVID-19 IMPACT ON THE GLOBAL - Rebuilding Supply Chains An interview with Dr Victor Fung, Group Chairman of the Fung Group - SMU
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Rebuilding
Global
Supply Chains
An interview with
Dr Victor Fung,
Group Chairman of
the Fung Group
The Dorian Gray
phenomenon
In Financial Markets
Pinduoduo
Farmers on an
E-Commerce Platform
COVID-19
IMPACT ON
THE GLOBAL
VOL.7 S$16.00
ECONOMY
Vol.7 / Asian Management Insights
CONTENTS
06 10
01 CONTENTS AT THE HELM
04 FROM THE EDITOR 06 REBUILDING GLOBAL
SUPPLY CHAINS
an interview with
We are now seeing a Dr Victor Fung,
major transformation Group Chairman
of the Fung Group
of a distributed supply Tan Chin Tiong
chain morphing
into manufacturing VANTAGE POINT
everywhere and 10 THE IMPACT OF COVID-19
selling everywhere. on the global economy
Madhur Jha and
- Dr Victor Fung, Group Chairman Chidu Narayanan
of the Fung Group
2 Vol.7 / Asian Management Insights
EXECUTIVE BRIEF 66 SOLVING THE WORK-FROM-
HOME CONUNDRUM
20 THE HEDGE FUND EVOLUTION for HR policymaking
from periphery to mainstream Snehal Shah and
Suhaimi Zainul-Abidin Vineeta Dwivedi
28 TRUST AND THE ‘HIVE EFFECT’
boost creativity and THE ENTREPRENEUR’S
LQQRYDWLRQLQIDPLO\ÀUPV CORNER
Rameshwari Ramachandra
72 TO SUCCEED, EDITOR-IN-CHIEF Asian Management Insights (ISSN 2315-4284) is published biannually at a recommended
Havovi Joshi retail price of S$16 by the Centre for Management Practice, Singapore Management
36 THE DORIAN GRAY MAKE HARD CHOICES
journeying in the world of University, 81 Victoria Street, Singapore 188065.
PHENOMENON EDITOR
LQÀQDQFLDOPDUNHWV VXSSO\FKDLQÀQDQFLDOVHUYLFHV Lim Wee Kiat
Jeff Tung We welcome comments and letters to the editor, which should be sent with the writer’s name,
Ajay Makhija
28 CONTRIBUTING EDITORS
Thomas Lim
address, and phone number via email to ami@smu.edu.sg. Letters may be edited
for length and clarity, and may be published in any medium and at the Editor’s discretion.
CASE IN POINT A WALK Sarita Mathur All letters become the property of Asian Management Insights and will not be returned.
44 PINDUODUO THROUGH ASIA Grace Segran
Submissions: We encourage submissions. Proposals for articles should be addressed
getting farmers on an 76 ‘HAMMER’ AND ‘DANCE’ PRODUCTION EDITOR to ami@smu.edu.sg. Unsolicited manuscripts will be returned only if accompanied by
e-commerce platform growing domestic tourism Sheila Wan a self-addressed stamped envelope.
Hao Liang and Cheah Sin Mei during the Covid-19 pandemic
Businesses are scrambling Lim Wee Kiat CONTRIBUTING WRITERS Subscriptions: Please email enquiry to ami@smu.edu.sg
to navigate the ‘new Chan Chi Wei
INDUSTRY WATCH Lipika Bhattacharya For further information, to advertise or request reprints, please contact:
normal’ of maintaining PARTING SHOT ami@smu.edu.sg
52 HEALTHCARE INNOVATION
continuity through the EDITORIAL BOARD
from the inside-out 78 A MATTER OF LIFE IN DEBT Indranil Bose Copyright © 2020 Singapore Management University. All rights reserved. No part of this
pandemic and beyond. Kenneth T. Goh, Richard R. not using debt to tackle Professor of Management Information Systems at the
publication may be reproduced or transmitted in any form or by any means, electronic
Smith, Cher Heng Tan, and Indian Institute of Management, Calcutta
- Havovi Joshi, Editor-in-Chief, David Dhevarajulu economic downturns
or mechanical, including photocopy, recording, or any information storage and retrieval
Asian Management Insights Deepika Deshpande Goutam Challagalla
system, without written permission.
Professor of Marketing and Strategy at IMD,
60 TWO-WAY MENTORING Switzerland
how employees can learn The views expressed in articles are those of the authors and not necessarily those of Asian
from one another Roy Chua
Associate Professor of Organisational Behaviour Management Insights, the Centre for Management Practice, or Singapore Management
Peeyush Gupta, Michelle D. & Human Resources at Singapore Management University. Authors may have consulting or other business relationships with the
Steward, James A. Narus, University
and D.V.R. Seshadri FRPSDQLHVWKH\GLVFXVV$OOLQIRUPDWLRQLQWKLVSXEOLFDWLRQLVYHULÀHGWRWKHEHVWRIWKH
Robert J. Kauffman publisher’s ability. Singapore Management University does not accept responsibility for
Professor Emeritus of Information Systems at any loss arising from reliance on it.
Singapore Management University
Michael Netzley
60 66 Adjunct Faculty at IMD
Rajendra Srivastava 78
Dean and Novartis Professor of Marketing Strategy
and Innovation at the Indian School of Business
Tan Chin Tiong
Professor of Marketing at Singapore Management
University
Philip Zerrillo
Deputy Dean at the Indian School of Business
CREATIVE DESIGN
C2 Design Studio Pte Ltd
4
FROM THE EDITOR
The impact of Covid-19 on Asian businesses and the economy Success and better performance, competitiveness, and growth
The Covid-19 pandemic will likely end when a vaccine can be made DUHHYLGHQFHGZKHQIDPLO\ÀUPVGHYRWHUHVRXUFHVWRLQQRYDWLRQVD\V
available to everyone, or when we have achieved some measure of Rameshwari Ramachandra. She avers that trust and the ‘Hive Effect’
herd immunity. Unfortunately, both are as yet nowhere in sight. ZLOOERRVWFUHDWLYLW\DQGLQQRYDWLRQLQIDPLO\ÀUPV
In the meantime, businesses are scrambling to navigate the ‘new Staying with the theme of innovation, Kenneth T. Goh,
normal’ of maintaining continuity through the pandemic and Richard R. Smith, Cher Heng Tan, and David Dhevarajulu tell us
beyond. In this issue, we report on how organisations in Asia how Singapore’s Tan Tock Seng Hospital (TTSH) had to strike a
are coping and changing the way they operate during this balance between reducing business-as-usual services and increasing
critical transition. outbreak-coping capacity when Covid-19 broke out. TTSH
Economists Madhur Jha and Chidu Narayanan lead with how successfully did this by focusing on innovating with an agile mindset,
the pandemic is likely to have long-term implications for the global an orientation cultivated over the years through a multitude of
economy. It has already started to reshape the way business and initiatives led by its Centre for Healthcare Innovation.
leisure are organised and conducted, and they predict two potentially To keep tourism alive in Asia, several countries have started
long-term changes that are areas of concern not only for policymakers, looking inward and are getting residents to spend their vacation
EXWDOVRIRUWKHÀQDQFLDOPDUNHWV GHJOREDOLVDWLRQDQGWKHEDFNODVK dollars in their own backyard. Lim Wee Kiat discusses the promises
DJDLQVWJOREDOVXSSO\FKDLQVDQGPHGLXPWHUPLQÁDWLRQ and perils of domestic tourism, and offers suggestions on how to
*OREDOVXSSO\FKDLQVKDYHEHHQZLWQHVVLQJVLJQLÀFDQWFKDQJHV bring the visitors back.
even before the pandemic. Three factors—technological developments, Deepika Deshpande takes us through the history of debt and
geopolitical shifts, and now the Covid-19 pandemic—are going to shows us how we can move away from using debt to tackle economic
result in a complete rearrangement of global supply chains, says GRZQWXUQV7KHÀQDQFLDOVHUYLFHVLQGXVWU\SURIHVVLRQDOEHOLHYHV
Dr Victor Fung, Group Chairman of the Fung Group, in an that the real issue is that the repeated use of a tool that provides
interview with Tan Chin Tiong. He adds that supply chains have short-term relief erodes the motivation to identify and address
now permanently shifted to a new normal, and will become far systemic problems.
more agile and resilient. Our Case in Point is on Pinduoduo, and authors Hao Liang
In 2013, Jeff Tung saw the potential of cross-border supply and Cheah Sin Mei describe the journey of the fastest growing
FKDLQÀQDQFLQJEHWZHHQ&KLQDDQG+RQJ.RQJ+HVWDUWHG e-commerce start-up in the history of China. They chart its meteoric
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AT THE HELM Vol.7 / Asian Management Insights
What is your vision of what these
The Covid-19 pandemic has pushed rearranged global supply chains might
certain sectors like healthcare into look like in the future?
prominence, and these sectors will , WKLQN WKHUH·V JRLQJ WR EH D ORW PRUH WDON DERXW UHVKRULQJ
constitute a major component of DQG HFRQRPLF QDWLRQDOLVP ZKLFK LV WKH LGHD WKDW FRXQWULHV
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REBUILDING
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THE GROUND UP
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how technological changes, FRPSOHWH UHDUUDQJHPHQW RI VXSSO\ FKDLQV DV FRPSDQLHV , FRQFHGH WKDW PRUH SURGXFWV ZLOO EH PDQGDWHG DV HVVHQWLDO
geopolitical shifts, and Covid-19 ORRN IRU DSSURSULDWH FRXQWULHV RI RULJLQ WR ILQLVK WKHLU RU VKDOO ZH VD\ QDWLRQDOLVHG QRW HYHU\WKLQJ ZLOO EH VR
are threatening to turn global SURGXFWV EHIRUH VKLSSLQJ WR WKH ÀQDO GHVWLQDWLRQ ,Q IDFW , ZRXOG DUJXH WKDW IRU VRPH VHFWRUV
supply chains upside down, in 6R WKH JOREDO VXSSO\ FKDLQV KDYH DOUHDG\ EHHQ KLW E\ JOREDOLVDWLRQ ZRXOG LQFUHDVH IXUWKHU )RU LQVWDQFH HYHQ
JHRSROLWLFDO DQG WHFKQRORJLFDO FKDQJHV DQG QRZ FRPHV EHIRUH WKH JHRSROLWLFDO LVVXHV DQG WKH &RYLG SDQGHPLF
this interview with Tan Chin Tiong.
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8 Vol.7 / Asian Management Insights
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VANTAGE POINT
Watch out for deglobalisation
COVID-19
and medium-term inflation.
By Madhur Jha and Chidu Narayanan
T
IMPACT ON THE
he human and economic toll of the Covid-19 pandemic cannot be overstated.
In 2020, the global economy might deliver its worst peacetime performance since
the Great Depression of 1929-31. Besides the short-term stresses and costs, the
GLOBAL ECONOMY pandemic is likely to also have long-term implications for the global economy.
It has already started to reshape the way business and leisure are organised and
BEYOND THE NEAR TERM
conducted. This is evident from the greater use of digital technology for aiding
education and work-from-home arrangements. Leisure activities such as shopping
and media entertainment are also increasingly being accessed via online platforms.
While these effects might reverse to some extent as the impact of the pandemic
fades, there are two potentially long-term changes that are areas of concern not only
IRU SROLF\PDNHUV EXW DOVR IRU WKH ÀQDQFLDO PDUNHWV GHJOREDOLVDWLRQ DQG WKH EDFNODVK
DJDLQVW JOREDO VXSSO\ FKDLQV *6&V DQG PHGLXPWHUP LQÁDWLRQ
Global supply chains have powered Asia’s growth
The rapid growth of supply chains across borders has transformed global production
and trade over the past 30 years. GSCs, coordinated by transnational companies,
account for nearly 80 percent of global trade. The expansion of GSCs has
contributed to rapid economic development in many emerging countries,
particularly China, and has taken the emerging markets (EM) share of world exports
to more than 50 percent. But globalisation and the expansion of GSCs has slowed
since the 2008-09 global financial crisis (GFC), as countries have turned
more protectionist and inward-looking in a bid to address slower growth, rising
unemployment, and widening income inequality.
The Covid-19 pandemic threatens to undermine the importance of GSCs even
further. The vulnerability of ‘just-in-time’ production processes around the world
was illustrated by the shutdown of China’s Hubei province in early 2020 after a
serious Covid-19 outbreak in Wuhan, the provincial capital. This vulnerability
is now becoming a political issue as governments turn their attention to the
There are two potentially long-term changes that
are areas of concern not only for policymakers
but also for the financial markets: deglobalisation
and the backlash against global supply chains,
and medium-term inflation.
12 Vol.7 / Asian Management Insights
shortcomings of their healthcare systems, with insufficient FOCUS ON REDUCING
medical supplies within easy reach. This drive for ‘health The Covid-19 pandemic has CONCENTRATION RISKS GLOBAL DEPENDENCE ON CHINA
highlighted the weaknesses in IN GLOBAL SUPPLY CHAINS FOR PPE EXPORTS (2018)
autarky’ could spill over into other industries also deemed
to be of national importance. how GSCs are currently structured. A focus for many governments since
European Union (EU) countries, for example, have the start of the pandemic has been to
already been calling for greater ‘manufacturing sovereignty’ :HH[SHFWDIHZFKDQJHVWREHFRPHPRUHHYLGHQWRYHUWLPH GHWHUPLQHZKHWKHUVSHFLÀFVXSSO\FKDLQV
60
at both the national and EU level. At the same time, the U.S. (especially for critical products) are
Share of imports from China (%)
administration has adopted an ‘America First’ policy based 1. Greater transparency overly dependent on any single country, 50
on the view that trade is a zero-sum game—implying that if Anecdotal evidence suggests that supply chains and to take measures to reduce this
40
other nations are benefiting, it must be at the expense of have become so complex in some cases that dependence. This might prompt some
the United States. The political resistance to globalisation ÀUPV DUH XQDZDUH RI WKHLU H[SRVXUH WR GLIIHUHQW countries to seek a smaller role for 30
has also grown since the GFC. Rising inequality, particularly countries or suppliers. We expect a greater China in their supply chains. Over
the past couple of decades, China has 20
in advanced economies, may have been driven more by focus on transparency and data-sharing on how
technological change than by increasingly complex supply GSCs are structured to identify and minimise cemented its role not only as a mega-
10
chains, but globalisation continues to take much of the blame bottlenecks. In addition to traditional trader but also as the key hub around
in political discourse. considerations such as cost and quality, there which GSCs are centred. The country’s 0
This is already reflected in export curbs and a desire to will be an increasing emphasis on the ‘three Rs’— share of global manufacturing of
Japan
Australia
France
Germany
Great Britain
United States
World
South Africa
Canada
Argentina
Russia
South Korea
Brazil
India
Indonesia
Turkey
Mexico
European Union
make essential products locally, so as to reduce export UHVLOLHQFHUHVSRQVLYHQHVVDQGUHFRQÀJXUDELOLW\³ intermediate products has risen to
dependence. For example, in response to the Covid-19 to determine how GSCs should be structured. 20 percent currently, from just 4 percent
outbreak, over 50 countries have imposed export curbs on in 2002.
medical supplies since March this year. This highlights how 2. Trend towards ‘just-in-case’ In the immediate future, countries
the changing global environment has resulted in more inventory management are likely to focus on lowering their FIGURE 1 Source: Peterson Institute for International Economics,
restrictive trade policies. Over the past few decades, the fall in transport significant dependence on China for Standard Chartered Research
and communication costs, as well as the use the key medical supplies needed to
FROM JUST-IN-TIME TO JUST-IN-CASE SUPPLY CHAINS of technology, has allowed firms to maintain fight the pandemic (refer to Figure 1),
Whether rising protectionism or pure economics is to very lean inventories—a ‘just-in-time’ model while protecting their own supplies CHINA’S DOMINATION OF PPE
blame, concentration risk may now become the dominant of inventory management. This is likely through export curbs. According to PRODUCT IMPORTS (2018)
focus. A supply chain that is dependent on a single source to change as firms face huge uncertainties research by the Peterson Institute for
(even for one small part of a product) is vulnerable to not only over pandemics but also tariff wars, International Economics (PIIE), China
paralysis when that source gets cut off. It takes which would suggest a shift towards the in 2018 accounted for 42 percent of the
2,500 components to make a car, but just the lack of ‘just-in-case’ approach. world’s supply of face shields, protective
one component to not make a car. Company boards will garments, gloves, mouth-nose-protection Face
shields
thus need to take concentration risks more seriously going 3. Emergence of shorter regional supply chains equipment, goggles, and visors—all the
forward. The result may be a shift in inventories away Firms are likely to prefer moving their essential personal protective equipment Gloves
from highly efficient but vulnerable (just-in-time) to more production to local sites. However, cost and 33( QHHGHGWRÀJKWWKHSDQGHPLF UHIHU
capital-intensive (just-in-case) processes. Most manufacturing quality considerations are likely to mean that to Figure 2).1 Protective
garments
firms typically keep only two weeks’ worth of inventories. the process will be staggered, with a move It is likely that countries will
A just-in-case approach would lead to a shift away from the to more diversified sources (from dependence increasingly focus on other products Goggles
and visors
current model of lean inventory management to one that on a single source) or to centres that are for which China is the main player in
geographically closer to reduce the possibility Mouth-nose-
focuses on stocking up. the GSC. According to the United protection
of disruptions. Since 2012, the share of equipment
Nations Conference on Trade and
HOW WILL GLOBAL SUPPLY CHAINS EVOLVE? foreign inputs that cross-border supply chains Development, China has a share of 0 10 20 30 40 50 60 70
The Covid-19 pandemic has highlighted the weaknesses in source from their own region has risen in over 50 percent in the GSCs of several Share of world imports supplied by China (%)
how GSCs are currently structured. Digital technology, North America, the EU, and Asia. This is likely manufacturing products. These include
LQFOXGLQJURERWLFVDXWRPDWLRQDQGDUWLÀFLDOLQWHOOLJHQFHLVDOVR to accelerate in the coming quarters. It is, precision instruments, automotive
making it easier to bring back production onshore or shorten in fact, already reflected in stronger intra- and communicative equipment, and
FIGURE 2 Source: Peterson Institute for International Economics,
supply chains to lower the risk of abrupt stops in production. UHJLRQDO IRUHLJQ GLUHFW LQYHVWPHQW )', ÁRZV machinery products. Standard Chartered Research
14 Vol.7 / Asian Management Insights
Meanwhile, growing political other EMs (for example, via the Belt face a high concentration risk. However,
rhetoric against China’s central role and Road Initiative) is also likely to respondents are motivated by a desire INCLINATION TO MOVE CAPACITY OUT OF CHINA
in global trade seems to be gaining help it maintain its position as a to diversify their operations rather
wider public support. In a March 2020 mega-trader. than to completely relocate their
survey by the Pew Research Center, In addition, while the shift towards existing China production, which is
a significant majority of respondents regional supply chains is becoming seen as unrealistic. If we add to this Others
in the U.S. viewed China more negatively clearer, factory relocation tends to be another 24.6 percent of respondents No, and previously not
actively considering either
after the start of the pandemic (refer to a multi-year project involving long who are not swayed by the trade war or
Figure 3).2 This also translated into a planning times and heavy investment. The Covid-19, but are still actively considering No, just as actively
considering as before
higher proportion of respondents now current macro backdrop is probably not relocating overseas, then close to 68
Yes, more actively considering than before,
YLHZLQJ&KLQD·VLQÁXHQFHDQGSRZHUDVD conducive to making such commitments. percent of respondents were planning because of both trade war and Covid-19
‘major threat’ to the United States. Our latest proprietary annual survey to relocate out of China. Among them, Yes, more actively considering than before,
because of Covid-19 outbreak
of manufacturing firms based in the 19 percent have already moved and
SOUTH-SOUTH TRADE LIKELY Pearl River Delta region in China, started operations; a sizeable 45 percent Yes, more actively considering than before,
because of US-China trade dispute
TO SUPPORT GLOBALISATION conducted earlier this year, showed were in the ‘still under consideration’
0 10 20 30 40
Deglobalisation for many countries that 43 percent of respondents are phase. Firms that are looking to
% of responses
is likely to equate to reducing actively considering moving their move out of China are planning to
dependence on China. However, capacity away from China due to the relocate production not back to
FIGURE 4 Source: Standard Chartered Research
China’s dominance of world trade U.S.-China trade tensions and/or developed markets (DMs), but to
is unlikely to be challenged in the Covid-19 crisis (refer to Figure 4).3 low-cost countries in the ASEAN
near future. In fact, its growing These developments have raised worries region, led by Vietnam (refer to
importance as a source of FDI for that manufacturers operating in China Figure 5). DESTINATION IF SEEKING TO MOVE CAPACITY OUT OF CHINA
Vietnam
INCREASINGLY NEGATIVE PERCEPTION OF CHINA BY U.S. RESPONDENTS
Cambodia
Myanmar
Bangladesh
Thailand
%, respondents favourable/unfavourable opinion
Malaysia
70
Unfavourable Indonesia
60 Taiwan
Hong Kong
50 India
Philippines
40
Others
Sri Lanka
30
Mexico 2019
2020
Favourable South Korea
20
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 0 5 10 15 20 25 30
% of responses
FIGURE 3 Source: Pew Research Center, Standard Chartered Research FIGURE 5 Source: Standard Chartered Research
16 Vol.7 / Asian Management Insights
Inflation: Back in the saddle again? FISCAL POLICY IS THE GAME- expansion will lead to higher inflation.
Another key change being increasingly discussed by market participants is CHANGER Despite large quantitative easing being G3 INFLATION BELOW 2% DESPITE STIMULUS
the likelihood that the pandemic will end the current low-inflation era and We think the most compelling argument undertaken by central banks over the
inflationary pressures will start to rise again. This will have implications for in favour of higher inflation is the past decade, inflation in the major G3
financial markets and the conduct of economic agents, as well as policymakers. more aggressive use of fiscal policy (in economies—which include the U.S.,
conjunction with monetary policy) to the Eurozone, and Japan—has remained
COST-PUSH INFLATIONARY PRESSURES EXPECTED TO RISE support growth. This is clearly a risk well below central bank targets or goals 4.0 6
Sum of changes to G3 balance sheets, US$ tn
Deglobalisation and disruptions to GSCs, which have the potential to lower cost WR RXU YLHZ RI ĩ O RZIODWLRQĔ RYHU WKH (refer to Figure 7). 3.5
5
effectiveness and push prices higher, are seen as a potential factor supporting coming years. A key reason for this limited 3.0
Weighted G3 CPI inflation, % y/y
higher inflation in the medium term. More importantly, major central banks have Central banks have opened the effectiveness was that commercial banks 2.5 4
responded aggressively to the economic impact of the Covid-19 pandemic, ÁRRGJDWHV RI OLTXLGLW\ LQWR WKH V\VWHP E\ chose to store extra liquidity back with 2.0 Inflation target Inflation
cutting policy rates to the zero lower bound and expanding balance sheets at an significantly expanding their balance the central bank in the form of excess 1.5
3
XQSUHFHGHQWHG SDFH *RYHUQPHQWV KDYH DOVR EHHQ TXLFN WR UHVSRQG ZLWK VLJQLÀFDQW sheets. This concerted central bank reserves, rather than lending it to the 1.0
2
stimulus packages, which are much larger than those seen during the GFC (refer to action over the past 10 years has been real economy (refer to Figure 8), 0.5
Figure 6). The sheer scale of the response has reignited the debate on whether dwarfed by central bank commitments resulting in a drop in the ‘velocity’ of 0.0 1
inflation is likely to rear its head again, after nearly three decades of easing to balance-sheet expansion since the money. The data so far suggests that -0.5
Covid-19 pandemic hit the global 0
inflationary pressures. A growing chorus of academics and market analysts believe this situation persists today as demand -1.0
WKDWWKHFRPELQDWLRQRIWKHVHIDFWRUVLVOLNHO\WRPHDQDQHQGRIWKHHUDRI¶ORZÁDWLRQ·LQ economy. However, we are cautious for investment loans remains weak, Balance sheet changes
-1.5 -1
the global economy. about assuming that balance-sheet and excess reserves with central banks Jun-08 Jun-10 Jun-12 Jun-14 Jun-16 Jun-18 Jun-20
continue to rise. At the same time, just
as uncertainty over job prospects and the
health of the economy has risen, so have FIGURE 7 Source: Bloomberg, Standard Chartered Research
the levels of precautionary savings.
SCALE OF FISCAL STIMULUS PACKAGES AS COMPARED TO GFC PERIOD Fiscal stimulus could be a real game-
changer over the medium term and the
biggest risk to our view of continued CENTRAL BANK LIQUIDITY EXPANSION RETURNING
low inflation. However, the stimulus VIA EXCESS RESERVES
14
GFC
12 CURRENT
The sheer scale of the
Excess reserves, % of central bank balance sheets
response has reignited 70
10
the debate on whether 60
% of GDP
8
inflation is likely to rear
Fed
50
6 its head again, after
4
nearly three decades 40
of easing inflationary
2 30
pressures.
0 ECB
20
U.S.
U.K.
Germany
Australia
China
France
Brazil
Italy
Indonesia
Malaysia
Saudi Arabia
Korea
India
Turkey
10
0
Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19
Note: Excludes loan guarantees and other financial support measures; as of 9 July, 2020
FIGURE 8 Source: U.S. Federal Reserve Economic Data,
FIGURE 6 Source: International Labour Organisation, Standard Chartered Research Bloomberg, Standard Chartered Research18 Vol.7 / Asian Management Insights
packages implemented so far are meant to be temporary and pandemic without spooking financial markets. However, medium term. The falling cost of such technology adoption
are aimed largely at replacing lost demand due to the if EM asset purchase programmes turn more aggressive to is likely to make such moves easier, while keeping cost-push
Inflation is likely to be a bigger risk in
pandemic. Governments are still worried about high match those of their DM counterparts, this could fuel LQÁDWLRQDU\ SUHVVXUHV XQGHU FRQWURO EMs; the use of unconventional policy
leverage; we expect nascent signs of economic recovery concerns about the risk of debt monetisation. Fiscal spending Despite the substantial policy stimuli recently, it would could push inflation higher.
to be accompanied by renewed talk of austerity and the in several EMs has been constrained by the lack of fiscal take a dramatic change in monetary-fiscal policy regimes
need to reduce high indebtedness across major economies. space; debt monetisation could lead to a significant increase for economic agents to revise their medium-term inflation
in fiscal spending, fuelling inflationary pressures. But less expectations. Authorities would need to signal that they might be less willing to accommodate a commodity-driven
INFLATION IS A GREATER RISK IN mature EM institutional frameworks increase the perceived plan to move away from an inflation-targeting regime (not VSLNH LQ KHDGOLQH LQÁDWLRQ 2Q WKLV IURQW LW ZLOO EH LPSRUWDQW
EMERGING MARKETS risk (among investors) of debt monetisation, fuelling worries just tweak it to reflect average inflation targets, or similar to closely track China’s efforts to rebalance its economy away
Inflation in EMs has remained mostly well-contained since of higher inflation through excessive printing of money and moves) and/or signal comfort with much higher deficits from an export- and investment-led (commodity-intensive)
the mid-1990s. Average inflation (excluding outliers) has subsequent spending. and debt levels. So far, there seems to be little appetite for model to a consumer-led economy. A renewed focus on
declined from high double digits in the 1980s to single this. In fact, in the U.S., there is already disagreement over rebalancing would help to lower commodity demand to
digits, driven by prudent monetary policy and fiscal Looking ahead the size and form of further fiscal stimulus, despite the fact match the expected fall in supply, given China’s status as
FRQVROLGDWLRQ :KLOH LQÁDWLRQ LV OLNHO\ WR UHPDLQ ZHOOFRQWDLQHG We expect to see inflationary pressures over the next year that a solid growth recovery has not yet occurred. the world’s marginal commodity buyer.
in the medium term, risks are skewed to the upside. Structural or two as the recovery takes hold. This is also likely to Inflation is likely to be a bigger risk in EMs; the use of
factors supporting lowflation in DMs, such as ageing fuel expectations of sustained overshooting of targets even unconventional policy could push inflation higher. We also
populations, are less in play in the EM space. The use of in the medium term. However, we take a cautiously contrarian expect US dollar weakness to be reflected in stronger EM Madhur Jha
unconventional monetary policy, dependence on commodities, view and expect the global economy to remain in lowflation currencies, but risk aversion driven by geopolitical events is Senior Global Economist at Standard Chartered Bank, India
DQG WKH ULVH RI WKH PLGGOH FODVV FRXOG DOO SXVK LQÁDWLRQ KLJKHU over the medium term. Structural forces that have supported could easily reverse this. Higher imported inflation, through Chidu Narayanan
On the other hand, rising deglobalisation could lead to weak inflationary trends—such as high leverage, ageing weaker currencies or more expensive imports, could push up is Economist, Asia at Standard Chartered Bank, Singapore
MRE ORVVHV WKHUHE\ ZHLJKLQJ RQ LQÁDWLRQ populations, and rising income inequality—will continue to LQÁDWLRQ H[SHFWDWLRQV LQ (0V +LJKHU FRPPRGLW\ SULFHV FRXOG
References
H[HUW GRZQZDUG SUHVVXUH RQ LQÁDWLRQ LQ RXU YLHZ ,Q DGGLWLRQ also push headline inflation higher in the medium term. The 1
Chad P. Bown, “How the G20 Can Strengthen Access to Vital Medical Supplies
UNCONVENTIONAL POLICY IN EMERGING while deglobalisation and supply chain disruptions in a recent drop in crude prices will likely cause supply losses as in the Fight Against Covid-19”, PIIE, April 15, 2020.
MARKETS COULD PUSH INFLATION HIGHER SRVW&RYLG ZRUOG DUH OLNHO\ WR EH LQÁDWLRQDU\ LQ WKH VKRUW investment is postponed and rigs are closed. 2
Pew Research Center, “U.S. Views of China Increasingly Negative Amid
Coronavirus Outbreak”, 2020.
Central banks in several EMs have successfully adopted run, we also expect them to spur the move towards greater With food and fuel accounting for 30-60 percent of 3
Standard Chartered Bank, “Shop Talk–GBA, Covid-19 and Shifting Supply
unconventional monetary policies during the Covid-19 automation and use of robotics in supply chains over the consumer price index baskets in EMs, EM central banks Chains”, 2020.EXECUTIVE BRIEF
From periphery to mainstream.
By Suhaimi Zainul-Abidin
I n 1966, an article published in Fortune drew attention to Alfred W. Jones’
hedged fund, describing it as “the best professional money manager” of the era,
and reporting that it had beaten the top performing Dreyfus Fund by 87 percent
over a 10-year period. 1 The hedge fund industry has grown by leaps and bounds
since then, and it is estimated that there are over 20,000 hedge funds worldwide
today. 2 It has drawn the interest of the investment world, prompting talented
traders and money managers to launch new hedge funds, and attracting wealthy investors
WR WKHVH QRXYHDX LQYHVWPHQW ÀUPV
While Jones’ hedge fund, launched in 1949, was truly a hedged fund, this
is not necessarily true of many contemporary hedge funds today. It is often said
that the term ‘hedge fund’ is clearer for what it is not, rather than what it is. Hedge
funds are not mutual funds, which are highly regulated investment vehicles made
available to the public, and typically restricted from the use of leverage and
derivatives. Instead, hedge funds span a broad spectrum of asset classes and
investment strategies, and have a wide range of tools at their disposal including
trading of derivatives, taking of short positions, and investment in illiquid
PDUNHWV 7KLV KDV UHVXOWHG LQ D KHGJH IXQG ZRUOG FRPSULVLQJ D YDULHW\ RI ULVNUHWXUQ SURÀOHV
THE
catering to different mandates and investment goals.
The hedge fund industry initially grew under the radar and without much
regulation until LTCM blew up in 1998. LTCM was a hedge fund with
US$126 billion in assets, and it boasted spectacular annual returns, including
a return of 40 percent in 1995 and 1996. Because of its size, it was deemed
HEDGE FUND too big to fail and the U.S. Federal Reserve had to step in to bail it out. This led to
regulatory authorities seeking to make more sense of the hedge fund industry.
Over time, as hedge funds negotiated further financial crises, more questions were asked
DERXW WKHLU UROH DQG LPSDFW RQ WKH ÀQDQFLDO V\VWHP
EVOLUTION It is often said that the term ‘hedge fund’ is clearer for
what it is not, rather than what it is.22 Vol.7 / Asian Management Insights
Despite these challenges and, at times, criticisms, the protection, ensuring market integrity and reducing systemic Institutionalising the hedge fund industry emotions and cognitive limitations) from the trading equation
hedge fund industry continues to draw more talent and capital. risks. The Dodd-Frank Act in the U.S. and the European In its earlier years, the hedge fund industry attracted and operation. A systematic investment strategy seeks to
As at end-2019, the industry’s assets under management Union’s Alternative Investment Fund Managers Directive, for mainly high net worth individuals (HNWIs) and family automate investment decision-making and trading processes,
(AUM) globally had doubled from its 2011 levels to reach instance, imposed very prescriptive regulations on hedge funds. offices as its investors. Then came investors with tax-exempt starting from data collection and analysis through to signal
roughly US$3.1 trillion over the eight-year period.3 2008 was also the year that the Madoff investment status like endowments and foundations, and later, insurance generation and trade execution. This allows the fund to trade
scandal made the news. The elaborate multi-billion-dollar companies. The outperformance of hedge funds following globally and around the clock, as well as across multiple
The global financial crisis and effects of Ponzi scheme shook the investment world. In his guilty the dotcom bust and the GFC led to increasing inflows exchanges around the world, while continually monitoring a
the Madoff scandal plea, Bernard L. Madoff admitted that he had not actually from corporate and public pension funds, as well as portfolio that can comprise thousands of positions, all done
The 2008 global financial crisis (GFC) was a trying time done any trading since the early 1990s, and all of his returns sovereign wealth funds, which led to an increasingly FRQVLVWHQWO\ DFFRUGLQJ WR FHUWDLQ SUHGHÀQHG UXOHV
for hedge funds in general. Hedge funds were labelled the since then had been fabricated. He was sentenced to institutionalised investor base. By 2009, the hedge fund The systematic investment manager would typically
true villains of the GFC for adding too much risk to the 150 years in prison and was ordered to make restitution industry was managing more assets for institutional create a model comprising algorithms that define the rules
banking system or, at the very least, exacerbating the crisis. of US$170 billion in total. 4 However, the price of investors than for its traditional clients, the HNWIs and that will produce trading signals for the firm to act on.
Regardless of the role that hedge funds may have played in Madoff’s indiscretion was also paid by the fund management IDPLO\ RIÀFHV The more complex the rule set and the larger the investment
the crisis, they were nonetheless severely impacted by it. industry. Investors were spooked and demanded higher Although the industry’s AUM had quickly recovered universe, the more complex the model will be. The basis
Many hedge funds suffered their biggest losses ever during governance standards that zeroed in on the need for and expanded following the GFC, the barriers to entry were of the rule set can differ depending on the investment
that period, even though the average industry losses of independent validation of positions and valuations. Despite also raised, while the inclination to invest only with big brand philosophy and the approach to portfolio construction.
15 to 20 percent paled in comparison to the 40 to 50-percent this, the industry quickly regained its footing as investors names began to take hold. This led to a concentration of It can be based on macro, fundamental, or technical data,
contractions registered in the equity markets during the began to recognise the diversifying value of hedge funds— assets among the biggest firms. The 1,600 or so hedge or a combination of them.
same period. some hedge funds delivered admirable positive returns in funds in the ‘Billion Dollar Club’ today manage over Systematic managers typically use statistical techniques
Following the GFC, hedge funds were subjected to a 2008 and many others recovered to new highs faster than the 25 percent of the assets in the hedge fund universe.5 to forecast short-term volatility of the markets within their
slew of new regulations, aimed at improving investor equity markets. Investors now expect hedge funds to have robust investment universe and correlations among different
operational set-ups, strong governance and risk assets or markets, in order to construct an optimal
management procedures, independent board directors, risk-adjusted portfolio. This approach also allows for
independent valuations of the fund’s assets, and reputable a more disciplined approach to risk management, which
independent service providers such as auditors and fund can be built into the investment models rather than applied
administrators. Not all these standards can be met by start-ups as an afterthought. The model can include rules that set
Every strategy will have its day in and small managers. So while the tighter regulations and hard limits on exposures and risks, including limits for
the sun, but ultimately, it is how heightened investor expectations have helped institutionalise volatility, as well as leverage at the instrument, asset
and professionalise the industry, the number of hedge fund class and portfolio levels. There are also systematic
a strategy performs through the
start-ups has fallen over the years. strategies designed to target a pre-defined level of
storm that matters.
portfolio risk. This gives investors a better idea of the
The rise of systematic hedge overall risk of the investment strategy.
fund strategies
Hedge funds were traditionally managed in a discretionary Singapore as a hub for hedge
manner, with trades and positions taken based on an fund activity
individual manager’s stock-picking or market-reading skills. The most successful hedge fund managers have traditionally
In recent times, however, systematic funds that use EHHQ EDVHG LQ 1HZ24 Vol.7 / Asian Management Insights
in turn stimulated the establishment of home-grown fund the fund manager. That being said, it is up to each Fund, for instance, closed itself off from external investors perfect sense for investment managers to try to meet their
management companies such as Quantedge Capital and manager to demystify the investment process and help in 1993 when it reached its strategy capacity. It returned requirements.
Dymon Asia, two of the largest home-grown hedge funds investors understand the risk-return profile associated external capital and made the fund exclusive to its Institutional investors generally prefer hedge fund
in Singapore. Local hedge funds Quantedge, Prulev, and with the proposed strategy. A good investment manager employees, and therefore prioritised sustainability of the strategies that have low volatility, deliver returns that are
Vanda were in the spotlight when they were named as some should be able to explain how the strategy fundamentally strategy’s returns.9 uncorrelated to equity markets (since these institutional
of the top performing funds globally in 2019, with all three works, and how the investment model will react under There is no one-size-fits-all approach to choosing a investors tend to invest the bulk of their capital in equities),
funds adopting a systematic approach to investing and different market environments, while still protecting the hedge fund. Investors individually have different preferences and which can be easily liquidated. This is one of the reasons
targeting a relatively high level of portfolio risk. 6
intellectual property underlying the strategy. regarding asset class limitations, risk tolerances, liquidity liquid alternative strategies like the equity long/short is
The future of Asia bodes well for Asian hedge funds. While On the other hand, a discretionary fund manager making requirements, and so on. There are some managers who are such a popular hedge fund strategy. It involves buying stocks
in the past, it may have been necessary for a hedge fund’s trading decisions based on macroeconomic assessments willing to cater to investor demand and design strategies that are expected to outperform and the short-selling of
success to market itself well in the U.S. and Europe can afford to be transparent about the fund’s holdings. But that meet different investor goals. Some of the big brand-name stocks expected to underperform, resulting in a strategy that
(particularly Switzerland), where the largest pools of since it is a discretionary strategy, there may be less consistency asset management firms like Man Group and Blackrock do should be market-neutral and relatively liquid.
institutional and private capital were traditionally managed, to the fund’s trades and performance, and it may be more a great job of creating something for every investor type However, there are also boutique hedge funds that focus
the outlook is changing. There are increasingly impressive GLIÀFXOW WR H[SODLQ WR LQYHVWRUV KRZ WKH VWUDWHJ\ UHDOO\ ZRUNV and are constantly launching new products. Given that at on a single investment strategy, which is typically their core
pools of capital in Asia and these investors are largely least two-thirds of the capital in the hedge fund industry strength. In such cases, the focus tends towards maximising
non-institutional investors looking for high-performing Choosing a hedge fund comes from institutional investors such as pension funds, the performance of that single strategy, rather than trying to
professional money managers. At the World Economic Forum All else being equal, investors would naturally want to university endowments, and sovereign wealth funds, it makes satisfy investor preferences.
in 2019, it was predicted that the gross domestic product of choose the fund with the highest returns. This is the single
Asian economies would surpass that of the rest of the world most important criterion applied by investors for choosing
(in purchasing power parity terms) by 2020. Asians have7
hedge funds and it relates to not only the fund’s average
EHFRPH ZHDOWKLHU PRUH ÀQDQFLDOO\ VDYY\ DQG PRUH LQWHJUDWHG historical returns, but also the variability and duration
with the rest of the world. According to an article published (or track record) of its returns. In general, investors would
by Forbes, the rate of growth of ultra-HNWIs between 2012 much prefer investing in a fund that has proven itself over
Boutique hedge funds focus on a
and 2017 in countries like China, India, Bangladesh, and a long period of time, compared to a fund with a short track
Vietnam had surpassed that of the United States.8 record of phenomenal returns. Every strategy will have its single investment strategy, which is
day in the sun, but ultimately, it is how a strategy performs typically their core strength.
High risk, high returns through the storm that matters.
The occasional headline-grabbing drawdowns of hedge funds Apart from performance, the size of the fund and the
create the impression that hedge funds are inherently risky. robustness of its team are also important. A firm with more
While it is true that the ability to take leverage exposes AUM will have a healthier capital base that allows it to invest
hedge funds to higher risks relative to mutual funds and in talent and systems.
investments in other traditional assets, the reality is that the +HGJH IXQGV UHTXLUH DOO SDUWV RI WKH EXVLQHVV WR EH ÀULQJ
level of riskiness of any fund depends on its investment strategy. Along with the front-office investment and trading teams,
At one end of the spectrum, there are hedge fund WKHUH DUH EDFNRIÀFH RSHUDWLRQV WHDPV LQYHVWRU UHODWLRQV DQG
strategies that target low volatility and aim to ensure principal capital-raising functions, and also legal and compliance
protection. On the other end of the spectrum, there are teams. If not performed well, any of these functions
hedge fund strategies that make large concentrated bets can trip the firm up. Investors also prefer that
on market moves. In between, there is a wide range the investment strategy is not resting on the shoulders of
of strategies with varying investment philosophies and just one or two individuals—something the industry terms as
approaches to risk management. ‘key man risk’.
There can also be varying degrees of transparency for While more AUM is generally considered a good thing,
a hedge fund’s investment portfolio. For example, quantitative a fund that has raised too much capital may struggle to
funds are often described as operating within a ‘black box’, replicate its historical returns. All investment strategies
denoting a strategy whose inner workings are opaque to have a strategy capacity limit, and the more profitable
outsiders. ‘Black box’ strategies are necessary because strategies tend to reach those limits faster. Beyond a
they are typically rules-based strategies, and a degree of certain point, the strategy will suffer from diminishing
secrecy is required to protect the intellectual property of returns. Renaissance Technologies’ famed Medallion26 Vol.7 / Asian Management Insights
Industry challenges and trends recent years as many actively managed funds, including hedge managers have responded by integrating ESG principles into
The alternative investments industry, which includes the funds, have struggled to match the returns of the S&P 500. their strategies, but the majority of managers are still
hedge fund industry, offers a wide variety of strategies with The success and growth of passive investing have led grappling with the concept and have been forced to climb a
very different return profiles. Being alternative to traditional to tremendous downward fee pressure on the hedge fund steep learning curve.
asset classes means that hedge funds will always be compared industry and other active investment strategies. The average
to traditional assets such as equities, bonds, and real estate. management fee charged by hedge funds has dropped from Investing in uncertain times
Investors often expect hedge funds to not only provide 2 percent per annum in the past to 1.5 percent per 2020 has been a challenging year for most investors and
non-correlated returns, but also outperform traditional asset annum, on average, today. There are even firms that have fund managers. Not only was the market decline in March
classes. This has been challenging in recent times, given done away with management fees completely, offering to one of the steepest ever seen, investors were largely still
the stellar performance in recent years of developed market levy only a performance fee when the fund delivers gains, licking their wounds and were unprepared for the market’s
equities that are easily accessible through Exchange Traded in order to attract more capital. swift rebound immediately thereafter.
Funds (ETFs). Investment managers are also increasingly experimenting With the effects of the pandemic on the global economy
The world’s largest ETF is the SPDR S&P 500, which with machine learning to improve performance. In theory, still unfolding, and the almost inevitable march towards
tracks the S&P 500 index, an index that has delivered an machine learning could potentially improve the model’s a trade and technological war between the U.S. and China,
average annual return of roughly 13.6 percent in the last ability to detect and adapt to changes in market conditions, no one seems to be predicting a good year ahead for the
10 years. Investing in an ETF is generally considered a thus boosting operational efficiency and returns. However, financial markets and the fund management industry. But
passive strategy as ETFs mainly seek to replicate the the ‘noise’ in the financial markets makes the application there are a great number of possible outcomes and there is
performance of a broader equity market, or a specific sector of machine learning challenging and it will take some time just no way the future can be predicted consistently. As if to
or trend. The main benefit of ETFs is its tradability before such strategies are validated. illustrate this point, the S&P 500 fell by roughly 10 percent
(investors can buy and sell ETFs throughout the trading day), In the meantime, hedge funds are dealing with the more in September, thanks to a confluence of negative events.
LWV GLYHUVLW\ RI KROGLQJV VLQFH LW VHHNV WR UHÁHFW EURDGHU PDUNHW urgent investor demand to apply environmental, social, and 2YHU WKH GHFDGHV VLQFH WKH DGYHQW RI WKH ÀUVW KHGJH IXQG
performance), its low expense ratios, and its transparency. corporate governance (ESG) principles to their strategies. and the birth of the hedge fund industry, hedge funds have
While markets are doing well and so long as alternative Apart from merely demanding that their portfolios avoid traversed from the periphery towards the mainstream of the
strategies struggle to outperform the markets, it makes sense the so-called ‘sin’ industries, like those dealing with liquor, financial world. During this period and through many crises,
for investors to prefer passive investment strategies like there is an overarching call for hedge funds to use their the industry has evolved and matured into a global and
ETFs, rather than pay the higher fees associated with actively capital to generate positive social and environmental outcomes, institutionalised industry, recognised for the important role
managed strategies. This has certainly been the case in while still delivering financial returns. Some hedge fund LW SOD\V ZLWKLQ WKH JOREDO ÀQDQFLDO V\VWHP
There is an overarching call for
hedge funds to use their capital
Suhaimi Zainul-Abidin
to generate positive social and LV&KLHI([HFXWLYH2IÀFHUDW4XDQWHGJH&DSLWDO
environmental outcomes, while
References
still delivering financial returns. 1
Sharon Reier, “From Jones to LTCM: A Short (-Selling) History”, International
Herald Tribune, December 2, 2000.
2
EurekaHedge, “Global Hedge Fund Database”, https://www.eurekahedge.com/,
October 2020.
3
BarclayHedge, “Hedge Fund Industry”, October 2020.
4
Aaron Smith, “Madoff’s Day of Reckoning”, CNN, June 29, 2009.
5
EurekaHedge, “Billion Dollar Hedge Fund Database”, https://www.
eurekahedge.com/, October 2020.
6
The Business Times, “World’s Biggest Hedge Fund Returns Are Found in
Singapore”, December 16, 2019.
7
Wang Huiyao, “In 2020, Asian Economies Will Become Larger than the Rest
of the World Combined–Here’s How”, World Economic Forum, July 25, 2019.
8
Niall McCarthy, “Where Super Rich Populations Are Growing Fastest
[Infographic]”, Forbes, September 27, 2018.
9
Katherine Burton, “Inside the Medallion Fund, a $74 Billion Money-
Making Machine Like No Other”, The Australian Financial Review,
November 22, 2016.You can also read
