Growing experience among Chinese institutions in alternative investing is driving increased internal sophistication as part of the knowledge transfer process, an AsianInvestor forum heard.

Domestic investors are seeking to learn more about the underlying drivers of return as they extend into the asset class, with the goal of achieving absolute return in different economic environments.

Speaking on a panel discussion about accessing global opportunities through alternative investing, Joanne Murphy, managing director at the Caia Association, told our China Investment Forum that she had been pleasantly surprised by the diversification process happening in China.

“A couple of years ago it was pretty much about real estate and private equity,” she said. “Now we are seeing more and more allocations to fund of hedge funds and people actively using consultants and advisers to help them in their diversification. The big bridge that we are seeing is the need for knowledge to be transferred.”

The panelists noted the need for investors to have an effective international communication network, combined with careful due diligence of both market and operational risks and macroeconomic studies to obtain an information advantage.

Chinese investors have tended to hire external managers to begin with while strengthening their back offices and risk control platforms. Simpler hedge fund strategies such as macro, CTA and long-short equity can subsequently be managed more easily inhouse, while more complex approaches such as high-frequency trading, M&A and arbitrage are still largely handled externally.

Institutions know now to pick external managers based on a minimum three-year track record, preferably five years, while redemptions would typically be caused by loss of key fund managers and inefficient risk controls.

“In alternative investing you need to stick to a clear strategy and do daily monitoring,” said Zhang Yumeng, China retirement and investments leader at Mercer. “You have to make sure the managers are in line with your requirements and objectives from the beginning. You have to know how much [of return] is tactical alpha and how much the manager’s ability to generate alpha.”

While he acknowledged that this was difficult for Chinese insurance companies, he pointed to a growing maturity that has seen local insurers and enterprise annuity programmes more willing to diversify into different asset classes, including alternatives. This, in part, has been driven by their saturation in traditional asset classes.

“As a consultant I have more conversations with insurers and annuities about diversified growth funds,” he said, indicating that some were allocating up to 10% to absolute return strategies.

“Diversification is important, but to achieve that goal it is meaningless to simply look at asset classes. You need to understand more about the underlying return drivers.”

Forum panelists included Wallace Yu, head of multi-asset group at China Investment Corporation (CIC); Li Xi, professor at Hong Kong University of Science and Technology (HKUST); and Duncan Caldwell, general manager for group sales and marketing for financial products at TFS Corporation.

All comments made by CIC staff during the China Investment Forum were non-attributable by prior arrangement.