Emerging-markets and Asia hedge funds lose some lustre

Asia and emerging-markets hedge funds remain highly sought after by investors, although North American and European strategies are gaining ground, according to new surveys from Credit Suisse and Deutsche Bank.

The Credit Suisse 2011 Hedge Fund Investor Survey found that 49% of global respondents planned to make allocations to Asian funds this year, putting it at the top of investor wish lists, with emerging markets (EMs) ranking a close second at 47%, followed by global strategies with 40%.

Compared to last year, however, demand for Asia and EM hedge funds were each down 12%, as investors sought better performance or switched to different asset classes. EM strategies are believed to have lost ground to developed markets, with North America and Europe each gaining 7% more interest from investors than in 2010.

The geographical shift in preference may be partly explained by bullish investor sentiment, according to Deutsche Bank’s Alternative Investment Survey, which found that about 55% of hedge-fund investors globally believe that North America would be the best-performing region this year, followed by China which was favoured by 20% of respondents. Only about 15% of investors predicted that Asia ex-Japan would top performance tables in 2011.

The picture remains rosy for Asia hedge funds, despite a drop in interest, with Credit Suisse estimating that 49% of investors based in the region are seeking new, locally run funds with an Asian focus. “The only start-ups who should spend significant time marketing in Asia are those based in Asia, those focused on Asian strategies and those with wealthy friends in the region,” says the report.

Moreover, Credit Suisse says the size of the Asia hedge fund investor pool may be bigger than previously thought, representing 18% of the global total when indirect holdings through American and European intermediaries – such as funds of hedge funds and private banks – are included in calculations.

The Americas have the biggest share of hedge-fund investments with 47%, followed by Europe at 35%. When intermediaries are taken out of the equation, Asia represents only 5% of investments, with the remainder almost evenly split between the Americas (47%) and Europe (48%).

Both banks are optimistic that the hedge-fund industry will see decent growth in 2011.

Credit Suisse’s prime services division polled more than 600 institutional investors representing $1.2 trillion of hedge-fund investments. The respondents estimate that the global hedge-fund industry would grow 18% this year to $2.31 trillion, equal to $350 billion in gains coming from both performance and capital inflows.

Similarly, Deutsche’s global prime finance survey of 528 investors holding more than $1.3 trillion of hedge fund assets estimate that the sector will see inflows of $200 billion this year, taking total assets under management to $2.2 trillion.

The substantial size of the still-growing hedge fund industry underlines its prominence in the overall asset-management sector, says Anita Nemes, Deutsche Bank’s global head of capital introduction. “More than 50% of investors increased their hedge-fund assets under management last year, further cementing the industry’s place in the mainstream.”