Institutional investors seeking exposure to emerging Asian equity markets face challenges in accessing many of the region's closed markets and are turning to exchange-traded derivatives markets, as well as over-the-counter (OTC) instruments that can provide the exposure they need, says TABB Group in new research published today.

"Innovations in Accessing Asia: Listed Equity Derivatives and Delta One Products” reveals that investment managers are active users of OTC equity derivatives, including contracts for differences (CFDs), equity swaps, participation notes and other structured products.

Andy Nybo (pictured), a TABB principal, head of derivatives research and the report's author, says: "However, global regulatory efforts to reduce concentration of counterparty risk have driven investment managers to explore alternatives for exposure, leading them to centrally-cleared, exchange-traded products that can lower overall levels of risk."

According to TABB, as the appeal of developed markets waned in recent years, investors began examining new markets, searching for investment opportunities offering higher alpha and greater returns, especially emerging markets in Asia. Hedge funds are focusing their attention on the APAC markets, with 33% of US and European funds targeting the region for new investments. However, Nybo explains, direct investment in the emerging equity markets of Asia has been hindered by low market capitalisation, restrictive regulatory environments and capital constraints that prohibit direct access to cash markets.

"Asia's relatively stable political and regulatory environment has done well to attract investor interest," Nybo says, "but some of the region's regulators seem to use regulation as a policy tool in an attempt to control market fluctuations." He adds that markets with heavy-handed regulatory authorities face a backlash from investors seeking opportunities and provide an opening for regional exchanges to launch products designed to meet investor demand for exposure to more closed markets.

"Pent-up demand from investors will contribute to innovation and new product launches by these emerging Asian exchanges to capture investment flows from both international investors and Asian-domiciled hedge funds," he adds. "Many of the region's regulators are very keen to promote greater participation in the financial markets. They are eager to attract strong capital flows from investors all over the world."