Investors in Asia have sharpened their focus on private markets, hedge funds and absolute-return strategies amid the recent global market turmoil, which has been exacerbated by Britain’s vote to exit the European Union, says a senior consultant.
Adeline Tan, head of investment advisory at Mercer in Hong Kong, told AsianInvestor that absolute return had proved its worth in the aftermath of the referendum.
The outcome of the vote has helped boost demand for such strategies, said Tan. “Especially in Hong Kong, some clients have the feeling of not wanting to do too much to their portfolio. But something like Brexit does shake people from their comfort zone and widen the acceptance of new ideas.”
The new wave of bond strategies being adopted by the more nimble Asian asset owners is a little more absolute-return-focused than in the past, said Tan. While they tend to go for high-grade bonds, she noted, their asset managers can take positions in currency as well.
In the current environment, that includes being more neutral on – that is, reducing the weighting to – UK gilts and European bonds. Ultimately, investors should be using more dynamic structures than simply allocating to global bonds, she said.
“We have seen sovereign wealth funds, large public pension funds and Asian endowments adopting such strategies,” Tan noted. So it’s not a question of specific types of asset owners using such approaches, she added, but rather the extent to which their in-house teams are happy to deviate from standard global bond strategies.
Private debt – an asset class tipped by AsianInvestor at the start of the year – is also attracting more interest, said Tan. Senior loans are the first port of call, but some asset owners are now exploring mezzanine debt and distressed assets. Some that have already made distressed allocations are looking to move up the credit quality scale or to convert their long-only holdings into high-quality private credit.
Private debt can be a good entry point into alternatives, because it means investors can avoid mark-to-market volatility, noted Tan. The typical internal rate of return (IRR) for private debt is in the low teens, assuming an average across subordinated and senior debt classes and a vintage year of 2010, she said. That compares to IRRs of mid- to high teens for private equity and around 10% for real estate and infrastructure.
Meanwhile, hedge funds are also gaining renewed acceptance among Asian institutions, with their performance having held up well against traditional equity managers in June and the first half of this year. In particular, Tan said well-diversified multi-strategy hedge funds or funds of funds had been doing well.
For the month of June their performance was fairly flat, at around 0.5%-0.1%, according to Hedge Fund Research’s defensive benchmark and Mercer’s multi-manager hedge fund mandates. This was despite the Brexit vote hitting global equity markets; any gains they made earlier in June were wiped out by the 7% fall in UK stocks and the 5% drop in Europe last week.
Demand for this asset class is a turnaround from the post-2008 crisis years, when hedge funds were widely shunned for some time.
Institutions such as Korea’s $435 billion National Pension Service and Korea Post's savings bureau ($65 billion) have been building their hedge fund exposure of late, alongside a general institutional trend of raising offshore and alternative allocations.