Private banks see hedge fund demand rising

Citi Private Bank has seen an eightfold rise in sales of hedge funds through its Asia platform since 2012. Swiss firm Pictet also sees growing demand for the asset class.
Private banks see hedge fund demand rising

Hedge funds are coming back into favour in Asia, say executives from Citi Private Bank and Pictet Wealth Management, speaking on a private roundtable for product selectors hosted recently by AsianInvestor.

The asset class represents by far the fastest growing part of Citi Private Bank’s business in Asia right now, with the firm citing an eightfold increase in sales of these strategies since 2012.

This admittedly comes from a very low baseline in 2012, when “nobody was buying hedge funds at all”, said Roger Bacon, Asia-Pacific head of management investments at the US bank.

The demand level is “not quite back to where it was in 2006/2007, but certainly some of the bad memories of the hedge fund industry in 2008 have finally started dissipating, he added.

Bacon stressed the importance of selectivity. “Buying an index or a diversified fund of hedge funds is not really giving the juice or the risk-adjusted returns clients are looking for. So we’re seeing them going for single strategies. But we’re trying to encourage them to buy eight or nine funds rather than two or three, just to diversify the risk a little bit.”

However, private wealth clients remain well below the 16% allocation Citi would recommend in its moderate-risk portfolio, the middle of five model portfolios.

“The reality is that most clients are somewhere considerably lower than that, probably around 5%,” said Bacon. “It has been starting to go up, but it’s still well below what we are recommending from a portfolio and asset allocation perspective.”

As for types of strategy, flows have migrated from macro into equity long/short in the past year, he noted. “That’s clearly predicated on the view that we’ve had as a house – and much of the street shares – that equities are still probably a good place to be, but you need to be relatively selective.”

Richard Mak, Asia head of investment advisory at Swiss private bank Pictet, agreed that demand for hedge funds has been recovering in the past 12 months. Clients are becoming more receptive to alternative investments again, such as private equity and hedge funds, he noted.

As for specific strategies, distressed fixed income with low-duration risk is a good alternative to traditional bond investments, which are currently expensive, said Mak.

“Another interesting area is absolute-return fixed-income funds that have more flexibility in managing the duration risks when interest rates go up.”

Citi also likes the absolute-return concept, said Bacon, but is getting pushback from clients with over-high expectations.

“A lot of these absolute-return fixed-income funds are promising cash plus 500 basis points through the cycle,” he noted. “And Asian clients say ‘that’s fine, but I’ll just stick it in the bank, I don’t really care about cash plus 5%’, because their expectations of returns are still too high.

“Their counterparts in Europe and the US would be all over this, because you would think everybody would want to buy a very good risk-adjusted return of 500bp over cash.”

*The roundtable article appeared in AsianInvestor’s Fund Selector Report, which was distributed to a selected list of recipients this month. Please contact Rebekka Kristin at [email protected] for more information or to obtain a copy. AsianInvestor is hosting its first Fund Selector Forum on November 12; please click here for more details.

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