Hong Kong retail investors appear to be at a crossroads, piling into multi-asset funds as a means to manage volatility ahead of the US Federal Reserve's tapering of its quantitative easing (QE) programme.

In the first six months of this year they invested a net $8.5 billion into balanced funds, featuring a split of equity and fixed income allocations, according to figures from the Hong Kong Investment Funds Association (HKIFA). That dwarfs the $439.4 million invested in the same period last year.

Bruno Lee, chairman of the HKIFA's unit trust sub-committee, describes the inflows as astonishing. “Historically, this type of multi-asset product has not been a major seller,” he tells AsianInvestor, noting the local retail community tends to choose either equity or bond investments, but rarely a mix.

“Investors are at a crossroads now and I think this middle of the road type of product, the multi-asset-type fund, will be quite a useful transition,” he predicts.

Anticipation of a rise in interest rates ahead of planned QE tapering by the US central bank, coupled with volatility in stock markets, has led investors to re-think their allocations.

“Fixed income has offered good returns in the last three-to-five years, but people have been hearing a lot about the tapering and how [the Fed] will reduce its bond purchases. Interest rates may go up, so the fixed income returns may not match last year’s,” Lee says. “Then with public equities, investors in general might be concerned about the uncertainty in the markets.

Although forecasting investor behaviour is difficult, Lee anticipates that the rotation into balanced portfolios will continue for the foreseeable future.

Total inflows into mutual funds hit $10.5 billion in the first half, a 69% increase on the $6.2 billion invested in the first six months of 2012, HKIFA data shows.

The Fed's planned tapering announcement led to an exodus from emerging markets, with Hong Kong investors no different to their global counterparts.

Local investors redeemed $141.1 million from global emerging market equity strategies in the first half, far higher than the $18.2 million in outflows in the same period last year. Emerging market bond strategies similarly suffered redemptions of $141.1 million, compared with $823.9 million in inflows previously.

“Emerging market equity and bonds is an area that’s under some pressure,” Lee says. “The adjustment has been sharp in some cases. Given the fact that emerging markets have dropped quite a bit already, we expect that emerging market redemptions may stabilise a bit, as long as there’s not further bad news.”

Also noticeable was the shift out of high-yield strategies, with investors yanking $258.3 million from these funds, an about-turn from the $1 billion invested in the same period last year.