Investors eye Asian hedge funds and private equity

Private wealth and institutional clients in the region, and globally, are showing an increased interest in Asian alternative assets.

Asian hedge funds and private equity are increasingly looking like worthwhile bets, and investors within the region are now more ready to allocate capital directly to such assets, say investment advisers.

Asian hedge funds and private equity offer attractive growth rates for investors globally, says Ananth Shenoy, Asia head of managed investments at Citi Private Bank in Singapore.

"It's still early stages in Asia, but we are now in the growth phase as far as the hedge fund industry is concerned," he says. "So from that perspective there's more reason for us to look at locally sourced and developed solution sets."

The hedge fund industry used to be more US-centric, adds Shenoy, but now there's a trend for more managers to be based in Asia or have part of their exposure coming from the region for their alternatives strategies.

"Clearly professionals in the industry are seeing this region as an opportunity for them to drive hedge fund strategies," he says. Long/short hedge funds are still dominant, but there are an increasing number of funds following niche strategies, such as credit and distressed, macro, arbitrage and volatility. Shenoy also notes there are more thematic funds focusing on a particular sector or geography than in the past.

Private equity is also going to be a major growth area in Asia, he says. The industry is facing challenges at the moment, such as high levels of leverage following a large number of buyouts.

"But for countries like China, India and the South Asian region, there will continue to be growth opportunities as opposed to buyout deals, so growth investing is going to be one of the areas attracting capital, with little leverage," says Shenoy. "Leverage is not going to be a driver of success."

In India, infrastructure will be a big area, as will technology and the consumer/retail services space, he says, adding that the situation is similar in China. 

Of course, reduced leverage will affect the type and size of deals that can get done, but it will not affect other metrics in the sector, nor even the sector's return profile, says Shenoy. For good managers, the growth rates are pretty attractive.

There appears to be a similar trend towards hedge fund and PE investments among institutional investors within the region. "Asian institutions traditionally started investing in alternatives through hedge funds-of-funds and private equity funds-of-funds," says Chi-Ho Song, recently appointed head of the Singapore office of investment consultancy Cambridge Associates. "Gradually, these institutions are starting to express interest in building investments directly in managers themselves."

This is the result of both being more familiar with the asset class as a whole and recognising the importance of retaining greater control from a risk management perspective, says Song, especially after the events of the past year.

Cambridge Associates helps clients build direct programmes in hedge fund and private equity managers. Song says a direct programme has strong merits if a firm has the scale to implement one, including lower costs, customisation, and direct ownership of manager relationships. He says Cambridge has seen a pick-up in interest in this area from Asian institutions.

However, it has traditionally been the case that Asian institutions are often not willing to pay for investment consulting advice -- but this may be changing. "Asian institutional investors have become much more sophisticated and are increasingly adopting global best practices, such as working with investment consultants," says Song.

"We certainly see this as a continuing trend, where Asian institutional investors are increasingly valuing the importance of conflict-free investment advice," he adds. Song sees this as important, given that financial markets and investment products have become more complicated over the years.

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