ETLT -- Mongolia Lures Hedge Funds as Mines Fuel Economy Update1)
By Patricia Cheng
Nov. 1 (Bloomberg) -- Hedge funds are turning to a new outpost in the drive to boost sagging returns: Mongolia.
Rapid economic growth, fueled by copper and gold mining, is attracting investors willing to tolerate corruption and unpredictable regulation. With their returns lagging behind those of Asian stock indexes, fund managers are taking on greater risk in small emerging markets once considered exotic.
``The search for investment returns is driving hedge funds and private-equity specialists to unusual places like Mongolia,'' says Tom Ashworth, a director of Sniper Capital Management Ltd., which manages a $200 million fund that invests mainly in the Chinese territory of Macau. ``It's a new frontier. It's the equivalent of investing in China in the '80s.''
International investment in Mongolia's mining, tourism and telecommunications industries is spurring an economy where more than 30 percent of the 2.5 million people remain nomads. Today, Mongolians are trading in traditional felt-covered yurts for homes and cars as the country recovers from the recession that followed its escape from Soviet domination in the early 1990s.
Ulan Bator -- the gray capital filled with Soviet-era apartment blocks and companies named after the 13th-century Mongol warrior Genghis Khan -- in September hosted a forum to attract investors seeking a new frontier.
`Awash With Liquidity'
Lim Advisors Ltd., a Hong Kong-based hedge fund that manages $650 million, has been scouting Mongolia for more than four years, says Dean Van Drasek, an executive director. The fund is supplying short-term debt and trade finance for projects that can yield 12 percent to 20 percent on a secured basis, he says, declining to identify the investments.
``The world is awash with liquidity,'' says Thomas Tsao of Gobi Partners, a Shanghai venture-capital firm that oversees $100 million. ``Mongolia is an exciting growth market where few people have gone.''
The sale of state assets, which began in the 1990s, continues to provide investment opportunities. Gobi Corp., the country's largest cashmere producer, and MIAT Mongolian Airline, the national carrier, are among the state-controlled companies seeking capital.
Lee Cashell, managing partner at Asia Pacific Investment Partners, a Hong Kong-based private-equity firm, is raising a $25 million Mongolia-focused property fund. Real estate prices should continue to increase by 15 percent to 25 percent a year because of a housing shortage, rising incomes and the migration of nomads into Ulan Bator, he says.
Lackluster Returns
Hedge funds investing in Asia returned an average of 6.2 percent in the first nine months of the year, down from 9.1 percent a year earlier, according to data from Eurekahedge, a Singapore-based research company. The Morgan Stanley Capital International index for the Asia-Pacific region, excluding Japan, rose 12 percent in the same period.
Hedge funds are private pools of capital that allow managers to participate substantially in the gains of the money invested.
Mongolia's economy grew 6.2 percent last year, following a 10.7 percent expansion in 2004. The country has huge reserves of copper, gold, coal, tin and iron, and rising mineral prices should ensure growth exceeding 6 percent this year, according to the Manila-based Asian Development Bank.
Rio Tinto Plc, the world's second-largest mining company, last month paid $303 million for 10 percent of Vancouver-based Ivanhoe Mines Ltd., which is developing Asia's largest copper deposit at Oyu Tolgoi mine in the southern Gobi Desert. London- based Rio Tinto may invest $1.5 billion to help the mine produce as much as 1 billion pounds of copper a year.
Hungry China
``It's unlike the rest of Asia -- lots of natural resources, a huge landmass and a small population,'' says Robert Lewis, who manages about $40 million at Singapore-based hedge fund Novatera Capital Pte and recently visited Mongolia. ``The challenge is identifying the right partners, either Asian or Western.''
The country's advantage is having a resource-hungry neighbor eager to develop its mineral deposits. China, the world's largest copper user, provides half of Mongolia's overseas investment.
``The story of Mongolia is the story of feeding resources to China,'' Cashell says.
Mongolia's disadvantages are graft and political interference.
About 25 percent of Mongolians surveyed last year by the San Francisco-based Asia Foundation said they had paid a bribe in the previous three months, says Bill Foerderer, the organization's country representative.
The government has made fighting graft a priority, and parliament in July passed an anti-corruption law, he says.
Mining Tax
In May the government, led by Prime Minister Miyeegombo Enkhbold, introduced a windfall profit tax on copper and gold exports. Miners had little advance notice, and the measure was approved with ``inexplicable haste,'' Ivanhoe Mines President John Macken said in a statement.
``The opportunities are vast,'' says Ariunaa Batbold, managing director of Mongolia International Capital Corp., an Ulan Bator-based investment bank that is raising a $25 million private equity fund. ``But you need to have a high tolerance for risks because it's very much an emerging market.''
Gobi's Tsao, who attended the conference in Ulan Bator, says Mongolia's potential may justify the risk. He plans to visit the country again next year.
``I don't think it's inconceivable that in a couple of years a few deals get done, and then everybody wants in,'' he says.
To contact the reporter on this story: Patricia Cheng in Ulan Bator, Mongolia, through the Hong Kong newsroom at pcheng9@bloomberg.net
Last Updated: November 1, 2006 04:23 EST
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