Fitch Ratings expects growth in assets under management to be higher in the next few years in emerging Asia (China, Indonesia, Malaysia and Thailand) than in more mature markets such as Singapore, Hong Kong, Taiwan and Korea.
The Asian region has a large, growing middle class population with a low penetration of managed products at 5 per cent of total financial assets on average compared with 15 per cent in western countries.
During the past few years, growth has been higher in Indonesia, Malaysia and Thailand and in the institutional segment compared with Singapore, Hong Kong, Taiwan and Korea. Unlike other countries in emerging Asia, China has suffered from its equity focus in a five-year bear market and an under-developed debt market until recently. Nevertheless, Fitch believes that a stabilisation/rise in equity markets and recent regulatory initiatives to expand Chinese capital markets will allow the gap to be closed in the next few years.
"East Asia represents a growth opportunity for international asset managers but distribution in the region is not straightforward," says Aymeric Poizot, Managing Director in Fitch's Fund and Asset Manager Rating Group. "The cross-border wealth management and institutional segments are very competitive, while in retail, large consumer banks dominate distribution in most countries -making distribution agreements critical."
Historically, foreign funds have been distributed in Singapore, Hong Kong, Korea and Taiwan, notably through private banks, wealth managers or financial advisors. As hubs, Hong Kong and Singapore account for USD2trn of offshore funds' assets under management (AUM), largely consisting of European UCITS funds whose number has grown to reach around 6,000 funds in 2012.
China and Korea dominate the USD1trn domestic onshore market in East Asia but emerging Asia already accounts for 15 per cent of the region's onshore AUM and continues to grow fast.
"Domestic funds exhibit a bias towards core fixed income products and 2012 flows have continued to favour bond and money market funds. Multi-asset and internationally exposed funds are likely to attract growing flows in the coming years in Asia as in other regions, as they offer more diversification," adds Mr. Poizot.
Tristan Edwards, a former trader at Brevan Howard Asset Management LLP, has raised seed investment for a hedge fund in Singapore that will invest in Asian stocks based on a short-term trading strategy.
Mosaic Asset Management Pte will start running the strategy on March 1 with about USD100 million, part of which is from a joint venture of Woori Absolute Partners and NewAlpha Asset Management to invest in startup hedge funds, said Edward Moon, chief investment officer of Woori Absolute.
Mosaic is setting up after hedge-fund closures in Asia exceeded starts in all but one quarter last year as assets went to larger, well-established managers, according to Eurekahedge Pte. The average size at the start for Asian hedge funds in 2012 was USD70 million, Eurekahedge said.
Mosaic is the first investment for Woori Absolute, a Singapore-based alternative investment platform of South Korea Woori Investment & Securities, and NewAlpha, a Paris-based company specializing in seeding emerging managers. The venture was established in November to meet growing demand to allocate money to Asian funds.
The Mosaic Trading Fund will employ a so-called market neutral strategy to profit from both rising and falling prices in Asia’s most liquid stock markets, Moon said.
“After more than two years of difficult trading conditions in Asia, we are seeing stock correlations coming down, and liquidity improving,” Edwards said in the e-mail. “This lends itself well to strategies that focus on stock picking.”
Mosaic is in the process of receiving an allocation from a North American institutional investor through a managed account, Woori and NewAlpha said in an e-mailed statement, without naming the investor.
The Eurekahedge Asian Hedge Fund Index gained 9.8 per cent in 2012, the best performance since 2009, according to figures from the Singapore-based data provider. Total assets under management reached USD127.4 billion, about 28 per cent below the level in 2007, before the global financial crisis, according to Eurekahedge.
China is showing encouraging signs that it is willing to open its market to foreign investors and funds. Hedge funds are still excluded from the market but steps are being taken in the right direction.
Asia’s hedge fund industry is rapidly evolving and has become more sophisticated. The quality of managers has vastly improved in recent years and the range of strategies employed by Asian managers has broadened, say those with knowledge of the market.
Despite the increase in investor interest as well as the growth of new funds in Asia, mainland China remains tightly restricted to these vehicles. Nevertheless, almost a third (31.7 per cent) of all Asian hedge funds, which now number an estimated 1,150, are located in China/Hong Kong, according to Hedge Fund Research data.
On the bright side, the pace of change in the Chinese fund market is picking up. Over the past 12 months there have been several encouraging signs, most notably personnel changes at the China Securities Regulatory Commission (CSRC). People familiar with the regulator say the CSRC is now more open to hedge funds.
“My understanding, based on conversations with various local and global fund managers, is that the CSRC has a strong understanding of the alternatives industry,” says Henry Lee, head of the alternative investment group, Asia-Pacific, at HSBC Private Bank.
The Chinese leadership change in November 2012 has also put a more open-minded group of people into positions of authority, particularly in the financial services sector. This has prompted speculation that China’s economy will become more open to foreign investment vehicles.
While trade appears to be an area where Chinese officials are willing to loosen restrictions, hedge funds have limited access to Mainland China. For example, there is no private placement regime, despite this some large Chinese institutions, including China’s sovereign wealth fund, the China Investment Corporation, invest in foreign-based hedge funds. This is the case as such Chinese institutions are large enough and have the investment expertise to feel confident looking outside the domestic market.
Foreign hedge funds wanting to raise assets from smaller Chinese institutions or individual investors are still not allowed to market their products in China.
This may be slowly changing. This year began with some positive developments. The CSRC and the Hong Kong regulator, the Securities and Futures Commission (SFC), announced in mid-January they are working together on mutual recognition of funds.
In a speech in late January in Hong Kong, the SFC’s deputy CEO Alexa Lam spoke about the co-operation. “There is simply no channel for Hong Kong-authorised funds to sell directly to investors in the mainland and investors outside the mainland cannot invest in mainland-authorised funds. The mainland/Hong Kong mutual recognition initiative will open the gate to this mutual traffic flow for the first time. This will be a very substantial breakthrough,” she said.
“Hong Kong will offer a platform for mainland fund managers to compete against other international players, learn international standards and practices, understand the requirements and preferences of international investors and build international branding,” she added.
Although mutual recognition is aimed at long-only mutual funds, it is a significant step in opening China’s fund market and hedge fund managers have taken heart at the move.