Asian, EM hedge funds in sights of asset owners

Asia appears set to capture a slice of the $123 billion in expected hedge fund inflows this year, but the biggest strategies are expected to benefit the most.
Asian, EM hedge funds in sights of asset owners

Investors will seek out Asia and China-focused hedge funds this year, although AUM size remains a key criterion, meaning large strategies will likely be the biggest beneficiaries of inflows, finds a new Deutsche Bank report.

A forecasted $123 billion in net inflows this year is expected to grow global hedge fund AUM to $2.5 trillion by year-end, up from $2.25 trillion at end-2012, notes the 2013 Deutsche Bank Alternative Investment Survey, released yesterday.

The estimated inflow is based on the fact that 62% of investors planned to increase their exposure to the asset class this year, according to the poll of hedge fund investors. They include fund of funds, investment consultants, institutional investors, family offices, private banks, endowments and foundations.

By comparison, only 42% of investors say they increased their hedge fund assets in 2012.

Emerging markets will be the most sought-after region for hedge fund allocations this year, favoured by 46% of investors, followed by Asia ex-Japan (32%) and North America (30%).

Among emerging markets, China is seen as having the best prospects, with 35% of investors believing it will be one of top three performing markets this year, after North America (59%) and Western Europe (36%).

While the survey results bode well for the prospects of Asian hedge funds – which saw an estimated $500 million in net industry outflows last year – it is the largest strategies that will likely receive the lion’s share of allocations.

“We think AUM continues to be an issue for Asian managers,” says Masa Yanagisawa, head of the hedge fund capital group for Deutsche Bank in Japan.

“When we asked investors about the size of managers with whom they planned to invest this year, only 3% of investors stated that they were invested with firms with less than $100 million in AUM, and even at the $100-$500 million range only 17% of investors were seeking to invest in those managers,” Yanigawa tells AsianInvestor.

The 10 largest Asian hedge funds are estimated to have captured 60-70% of total capital inflows to the region last year.

Yet size is not an indicator of performance, with seasoned managers at Asia’s biggest strategies  typically registering mid-to-high single-digit returns last year – a trend seen among counterparts overseas.

However, the survey notes that “investors are not deeply disappointed by the mid-to-high single digit returns that they have achieved this year from their hedge fund investments”.

They cite an average return target of 9.2% for their hedge fund portfolios this year. Broken down by investor category, 79% of institutions say they are targeting 5-10% gains, while 51% of family offices expect returns of 10-15%.

Family offices, the report notes, are more opportunistic when allocating to hedge funds, with 38% indicating they had no minimum AUM preference.  

Compared with institutions, family offices tend to be more interested in start-up managers, with 31% indicating they did not require hedge funds in which they invest to have a track record. A further 40% are regular ‘Day 1’ investors, having contributed to the initial pool of money that a manager has on the first day of trading.  

There has been increasing interest among investors in the so-called emerging manager category of smaller and newer hedge funds, according to the report.

Of the pensions that have not invested on Day 1 or within three months of launch, 28% say they will consider doing so,  up from 10% last year.

“We predict that institutional investors will become increasingly comfortable with assuming new business risk, albeit at the right price,” says the report, referring to a reduction in manager fees that are typically offered to Day 1 investors.

Emerging managers tend to outperform longer-established peers in the first few years of operation, although there are greater associated risks.

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