Asia’s budding hedge-fund industry is springing to life, attracting the most money this year since pre-global financial crisis and beating returns in the US and Europe.
Net inflows of USD14.4 billion in the nine months ended Sept. 30 have brought total assets under management in Asia to USD140.8 billion, according to data provider Eurekahedge Pte. Ltd. Asia’s hedge-fund industry is closer to the peak of USD176 billion reached in 2007 than it has ever been in the last five years, a reflection of growing confidence in the region’s hedge-fund managers and the prospect of high returns as economic growth in Asia remains far stronger than the rest of the world.
Japan-focused funds are the stand-out performers, surging 21.2 per cent in the first nine months, as Prime Minister Shinzo Abe has enacted aggressive stimulus measures to pull the economy out of two decades of deflation and stagnant growth.
Funds into China also returned 11.5 per cent as the economy kept up a fast growth clip, though performance elsewhere has been patchy with India and South Korea returning losses.
Overall, the region delivered a 10.1 per cent return in the first nine months, beating Europe’s 5.0 per cent and North America’s 6.3 per cent. By comparison, since the financial crisis, the Asian hedge funds outperformed European funds by 13.7 per cent, although they have underperformed North American funds by 11.0 per cent.
Asia’s hedge-fund industry has had a bumpy ride the past few years, with heavy redemptions and poor performance during the global financial crisis and a slow recovery since then. More than 100 hedge funds in the region have gone out of business each year since 2007, with the industry only growing by USD2.7 billion to USD126.4 billion last year. Asia remains dominated by small funds that have less than USD100 million under management.
The size of Asia’s hedge-fund industry remains small compared with other parts of the world. North American hedge funds manage USD1.3 trillion worth of assets, while European hedge funds manage USD414.7 billion.
But as fund managers beef up their presence in Asia, strong trends are emerging. Investors are favoring pan-Asia funds as opposed to those focused solely on one country as a way to limit risks in any one market, although there is still heavy interest in China. Plus, there is growing interest in funds focused on bonds and event-driven strategies, not just on stocks that were the traditional favorite.
India-focused hedge funds snapped their four-month losing streak in September this year, gaining 7.1 per cent. This was superior to other hedge funds broadly focused on Asia and even outperformed Japanese hedge funds.
But it was not sufficient to cover up slippages in previous months and India-focused funds are down 11.5 per cent in the period January-September this year. Whilst Indian hedge funds have posted losses of 3.6 per cent for the July-September quarter, in contrast, Asia-focused hedge funds have delivered an average return of 9.9 per cent for January-September 2013.
Globally, hedge funds were back to earning mode in September, thanks to rallies in underlying markets. North American hedge funds were up 1.7 per cent during the month after losing 0.4 per cent in August, while hedge funds targeted at emerging markets bounced back by 2.1 per cent after shedding 0.7 per cent in the previous month.
European hedge funds, too, posted a 2.5 per cent return for September, compared with a 0.2 per cent decline in August.
But despite the gains, hedge fund performance was inferior to the returns from equity markets. The Eurekahedge Hedge Fund Index — which tracks the performance of 2,404 funds — was up 1.2 per cent during September, whereas the MSCI World Index gained 3.9 per cent.
Positive investor sentiment in hedge funds drove up the total assets under management of the sector to USD1.9 trillion in September, just 2 per cent shy of their historical peak. This was the eighth straight month of net inflows into global hedge funds, with USD90 billion mopped up since January, according to financial data from research firm Eurekahedge.
Highbridge plans to raise about USD250 million for the Pan Asia Multistrategy fund when it opens to investors in early 2014, according to people with knowledge of the matter. The fund is led by 32-year-old Asia head Arjun Menon, who is based in Hong Kong, according to Bloomberg News. Queenie Tsao, a spokeswoman for Highbridge at RLM Finsbury Ltd. in the city, declined to comment on the plan, citing legal restrictions.
The new fund is opening amid an increase in investor demand for experienced hedge-fund personnel after the 2008 global financial crisis. About 43 per cent of institutions would not invest with managers with less than two years’ track record, an annual Deutsche Bank AG survey in February showed.
The fund will use strategies including credit and convertible arbitrage, equity long-short andcapital structure relative value. The team will be able to allocate assets to the best opportunities across geographies and asset classes, according to the document.
Investment allocation in real estate has grown to 16 per cent this year from 9 per cent last year, according to a report by research firm Campden Wealth that was commissioned by the Swiss bank and published on Tuesday.
Twenty-nine family offices across the region with managed wealth of a minimum USUSD200 million were interviewed about their investment allocation strategy and outlook for markets.
Besides real estate, the only other asset class where investors were looking to increase investment in the coming years was equities in developed countries, the report said.
In contrast, wealthy families are holding 14 per cent of their assets in the form of cash or cash equivalents at present but expect that allocation to fall to 8 per cent in three years' time.
The second annual UBS/Campden Wealth Asia-Pacific family offices survey found that investment allocations to venture capital and direct private equity had grown to 15 per cent this year from 4 per cent last year.
Asian investors are taking money away from equity and bond markets to fuel this move into direct investing, with equity market allocations in developed countries falling to 14 per cent of total assets this year from 21 per cent last year, according to the report.
Hedge fund investing by Asia's wealthiest families was cut by nearly half in the past year to 5 per cent this year, the report said.
Family offices are relatively long-term investors, with 74 per cent seeking to invest for at least five years.
UBS said wealthy families were becoming more bullish about investment prospects and twice as many respondents said they were more optimistic about the investment outlook than one year ago.
Brevan Howard, the world’s third-largest hedge fund, has moved most of its operations out of the UK, shifting dozens of jobs to the Channel Islands, Switzerland, Asia and the US to escape EU regulation and grow internationally.
Three years after opening a satellite office in Geneva, Brevan – which has USD41bn under management – now only has a “handful” of traders left at its London office and has moved out many of its senior operational jobs, people familiar with the company told the Financial Times. The publicity-shy hedge fund, which specialises in placing bets on movements in interest rates and bonds, employs more than 450 people worldwide. Fewer than 200 are now in London.
As recently as four years ago, almost all of its employees were based in the UK capital.
Brevan’s decision to shift business offshore comes as the EU’s sweeping new Alternative Fund Manager Directive, a law aimed at regulating hedge funds, is launched in the UK.
Most of London’s USD300bn hedge fund industry has accommodated itself to the new rules – which have proved to be far less onerous than many fund managers feared they would be. The Financial Conduct Authority, the UK regulator, has also sought to moderate some provisions to appease London-based fund managers’ concerns.