Global institutional investors increasingly want to use hedge funds to access emerging markets, especially China, a new survey by Credit Suisse shows.

The Credit Suisse 2019 Hedge Fund Investor Survey published on Thursday is based upon responses from 311 institutional investors. And it reveals that investors are increasingly comfortable with allocating capital towards hedge funds, that they prioritise performance and risk management when picking funds, and that the relatively strong performance of funds in Asia, particularly China, are raising their appeal. 

All told, support for hedge fund investments is shown to be fairly strong.

Fifty-four percent of survey respondents said they would maintain their current exposure while 38% said they intended to raise investments.

Hedge funds enjoyed a net demand balance of 30% (the percentage of investors saying they would increase investments minus those seeking to decrease investments), a level only bettered by private equity and venture capital (34% in net demand).

The strength in demand mirrors other hedge fund findings. For example, the first-half 2019 report by alternatives data provider Preqin noted that 79% of hedge fund investors aimed to maintain or raise their allocations, despite 55% being disappointed with returns in 2018. 

The Credit Suisse survey’s respondents are fairly optimistic too about the investment class, on average setting a target return of 7.2%. That's pretty bullish, even if it is down on the 8.5% return they expected in 2018. 

CHINA CHARGE

One recent but fast-developing trend among respondents is a rising conviction about emerging market, particularly China, hedge funds. 

The survey noted that respondents had a net demand of 47% for Asia-Pacific hedge funds, 36% for emerging markets, and 34% for Greater China hedge funds – figures that were 13%, 7% and 7% higher, respectively, than Credit Suisse's last survey in the summer of 2018.

Preqin figures support that too, with 47% of hedge fund investors naming China as the market offering the best opportunities in emerging markets. 

The reasons for this are simple: performance and accessibility. According to Jonathan Jenkins, head of equity sales and prime distribution for Asia Pacifc at Credit Suisse, the inclusion of a set of China A-shares into the MSCI Emerging Market Index in June 2018 was a compelling reason for more interest. The move by the index provider has attracted more global institutional investor attention to China's market and led some to pick hedge funds as the best way to earn some alpha. 

The thinking behind that has been enhanced by the performance figures so far this year. Asia hedge funds on average returned roughly 5.7% as of April, while China hedge funds offered over 10.3%, according to internal Credit Suisse estimates, based on figures from hedge funds.

It's a similar story at alternatives data provider Preqin; its year-to-date performance figure for Asia-Pacific hedge funds stood at 6.5% as of March-end. 

"The MSCI index inclusion last year was a really big deal that was somewhat masked by a difficult market, but this year we have seen an increase in the flow," Jenkins told AsianInvestor. "In China, allocators are tending to go for managers with longer track records who have proven they can [perform] during good and bad markets. I think that will continue for a while; it's a structural shift [in how investors are looking to allocate their hedge fund resources]." 

"We have been hearing a lot over the past few years that allocators were under-exposed to Asia hedge funds and greater China hedge funds," added James Tan of capital services for Asia Pacific at Credit Suisse. "But the greater inclusion of these markets [via index benchmark inclusions] and more attractive alpha opportunities has led more to visit the region and spend more time doing due diligence on these hedge funds." 

Globally, the most popular hedge fund strategy is emerging market equities, according to Credit Suisse's survey. It gained 23% in net demand, with healthcare following on 22%.

Event-driven distressed and macro discretionary come next with 21% of net demand apiece – a big increase on the 6% and 9% levels recorded, respectively, in 2018.

However, Asia-Pacific respondents this year favour multi-strategy funds most of all, with a net demand of 40%, Credit Suisse's new research shows (see chart).

This story was updated to clarify Jonathan Jenkins' and James Tan's quotes.