Asian institutions are emerging as a growing source of capital for hedge funds both within the region and globally, with a majority seeking to maintain or increase their allocations to the asset class, according to a new report by research provider Preqin.
Despite disappointing returns in 2011, 57% of Asian institutional investors polled by Preqin say they plan to maintain their allocation level for hedge funds, with 37% citing plans to increase the amount. However, investors are seeking to re-balance their investments in the asset class, redeeming from poor-performing managers and investing in more promising funds.
Asian institutions are likely to devote a significant portion of hedge fund allocation capital this year to funds they have not previously invested in, notes Preqin, with 23% focusing solely on adding new managers to their portfolios this year, and 42% planning on maintaining existing relationships while adding new managers. Only 12% say they will maintain existing manager relationships.
In short, investors are remaining loyal to the asset class, but their devotion among individual managers will vary according to performance. “While some investors may not be happy with all of their current managers, they believe satisfactory returns are still possible through hedge fund investment,” says Ivan Jincheng Han, who authored the Preqin study.
Asian hedge fund managers are set to remain the main recipients of inflows, the survey indicates. Having long benefitted from a home bias by domestic institutions, they will continue to do so in the future, having been cited as a preferred region by 83% of respondents.
By comparison, North American funds are favoured by 61% of institutions, with European counterparts gaining approval by 44% of respondents.
However, managers of the most prevalent Asian hedge fund strategy – long/short equity – will need to vie more competitively for institutional money. Although cited as a sought-after strategy by 40% of Asian institutions, it comes second to global macro (44%). Event-driven and managed futures funds each received 20% of the institutional vote, followed by multi-strategy vehicles with 16%.
A separate Preqin poll of Asian pensions found that they allocated, on average, 5.2% of investible assets to hedge funds, slightly lower than their target of 5.4%. Each pension had invested in three to six hedge funds.
According to prime brokerage executives in Asia, Japanese pensions are among the region’s biggest hedge fund investors and are expected to increase allocations to managers outside of their home country in order to diversify their portfolios.
Similarly, South Korean pensions are being viewed as a potential source of future capital for the country’s burgeoning hedge fund sector, while Australian hedge fund seeders – largely backed by domestic superannuation schemes – are said to be looking to expand into the greater Asia-Pacific region.