Asia hedge fund managers that can navigate the market’s anomalies or find opportunities in the credit space will help drive the regional industry, say industry executives.
“If you look at [performance] last year, it’s probably the strongest argument for Asian hedge funds,” says Joseph Pacini, head of BlackRock’s alternative investment strategy group in Asia Pacific, during a hedge fund panel discussion at Fund Forum Asia 2014 last week in Hong Kong.
While Japan had an Abenomics-fuelled bull run, Asia ex-Japan hedge funds outperformed the global industry in absolute terms, he says. Hedge fund managers focused on Asia Pacific including Japan returned 17.38% in 2013, according to data provider Preqin.
“What we found was that local managers did much better than managers outside the region which were invested in Asia Pacific,” says Amy Bensted, head of hedge fund products at Preqin. “[It] is a reason why investors should be looking at local asset managers within Asia Pacific, rather than US or global firms that have some investments there."
However, while the risk-adjusted returns for 2013 were good, "over the long term, the risk-adjusted returns for Asia-Pacific funds were lower than some other regions", she says.
Investors currently have “a very low risk appetite”, adds Bensted, and “some of the volatility from returns in the [Asia] market at the moment is putting some investors off”.
A BlackRock analysis of earnings revisions shows that stock price corrections are priced in within a few hours in developed markets including Japan, says Pacini. But in emerging markets, “it can take two weeks”.
“When we talk about [managers] seeing value in the markets, there’s also the speed in which markets move that’s been recognised.”
Pacini adds: “There’s an interesting phenomenon [that occurs] when people are too quick to invest in the market in Asia. You may see an opportunity, but it may be undervalued if the rest of the world is not going to follow it with you. You’re going to lose in that.”
Another area where local alternative managers can gain an edge is the credit space, where there is “a major funding shortfall” in the region, notes Richard Johnston, head of Asia at consultancy Albourne Partners.
Asian companies need money to grow, but banks have pulled back and the bond market is insufficient to fulfil their capital requirements. “We’ve seen a whole host of products emerging” as a result, says Johnston. They include hybrid strategies that have features of both hedge funds and private equity.
The credit space is “exactly where we’re seeing a lot of opportunities today and where we expect it to be in the future”, adds Pacini.
He notes that “entrepreneurs in Asia [are] much less keen on giving up equity. They would rather give a share of debt”.
BlackRock has spent more than a year looking at the private lending space in Asia, which it believes offers a means of exposure to corporate growth through debt instruments and warrants. When growth companies are involved it can take local, specialised knowledge to structure a deal, says Pacini.
Sometimes hedge funds or other alternative vehicles "become, to some degree, the sole potential suppliers of that capital just because nobody else can figure out how to do it”, says Pacini. “That’s where the premium becomes attractive.”