Go east, and go hedge funds, investors say

Aug 23rd, 2010 | Filed under: Hedge Fund Industry Trends, Today's Post | By:
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From an investing standpoint, Asia and more specifically China haven’t exactly been the post-crash darlings many had expected. Chinese stocks in particular have taken a beating, while indices in other Asian tigers have had their tails handed to them.

All the more reason why this recent survey from AsianInvestor and Clifford Chance noting that buy-side investors were keen on the region caught our eye on a lazy August Friday.

Not only are the 249 buy-side participants surveyed by Ipsos gung-ho on Asia in terms of investment opportunities, they see hedge funds and other non-traditional investment vehicles as the way to put their money to work.

Indeed, a full two-thirds of respondents indicated that they clearly prefer (or are expected to prefer) equity capital markets when tapping the Asia story.

Respondents were allowed to select up to three types of instruments, and 64% included equities in their answer.

In the same survey last year, the preferred vehicles included bonds and distressed/opportunity funds, according to the report.

In percentage terms, the biggest change was with respect to hedge funds. Whereas in 2009 only 16% of respondents thought these would receive inflows, now 33% say these are on the table (see chart below).

“The negative feeling toward hedge funds is over,” notes Matthias Feldmann, partner at Clifford Chance’s funds practice. James Walker, another partner at the firm, says the Asia hedge-fund industry in particular is displaying “a coming of age.” In contrast, the survey suggests there are low expectations for managed accounts, which last year were being hailed as holy grails.

It’s not just Asia that is attracting interest. India too is high on the list of buy-side investors looking to put capital work. According to the survey results, China and Asia ex-Japan are the clear favorites, attracting 68% and 62% of respondents’ favor, respectively. The US and India tied for the silver, at 39% and 38%, respectively.

And what kinds of investment vehicles are investors looking at? Beyond equities and hedge funds, certainly lots of different kinds of credit instruments, from investment grade on down. Surprisingly, though, institutional investors aren’t so keen on fund of hedge fund (FoHF) structures, with only 29% expressing interest.

Despite the increase in interest in alternatives, concerns about regulatory still play second fiddle, with a full 64% of respondents indicating the potential implementation of the Alternative Investment Fund Directive (AIFM) Directive by the EU is no biggie, and a 76% saying they’ll do what they have to do if the SEC changes the 15-person exemption rule for fund advisors.

Last but not least, respondents were asked about where they demand for UCITS-compliant hedge funds being most prominent. Some 82% of respondents say Middle East investors will increase UCITS holdings the most in the next three to five years, versus 10% for Asia and 8% for Latin America.

In Asia, it was 50-50, with half expecting hedge funds to set up as UCITS-3 funds, and/or restructure Cayman-domiciled funds into UCITS vehicles, and half saying they don’t expect to see any change.

“Hedge funds in Asia are taking seriously the idea of using the UCITS structure,” says Walker. “This requires some regulatory work, but there’s clearly a demand.”

Either way, it seems clear that Asia is on the agenda for many institutional investors, and they are keen to explore hedge funds to make it happen. And arguably for good reason: while Asian financial markets may more recently have languished their underlying economies are certainly doing well from a growth standpoint.

Of course, we have heard this story before, with unfortunate consequences like the Asian financial crisis to follow.  So it remains to be seen whether the money follows – especially with the Hang Seng and other key Asian benchmarks down a ways from their earlier-in-the-year highs.  And regardless of the health of the regions economies, asset inflows have be crimped recently according to new data.

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