Although State Street Global Advisors' enhanced equities strategies have been a worldwide hit, the firm is finding take-up among investors in Hong Kong and Singapore has been slow, in part because of client concerns about incorporating Japan in their regional allocation. The hurdle is proving to be the choice of countries to include in the base index.

On his recent trip to promote the product in Asia, Boston-based Theodore Gekas, principal, noticed an aversion among Asian institutions towards including Japan in their regional index. They either perceive Japanese exposure as an unnecessary drag on their base index, or don't want to combine distinct asset allocations for Japan and the rest of Asia.

Interest in the enhanced equity index product has been gaining momentum globally. SSgA currently manages about $30 billion in enhanced index assets, having established a separate enhanced team 10 years ago in the United States.

Interest throughout Asia Pacific has been growing over the past three years, spurred by bitter experiences of negative returns from more active approaches. Regionally, Australian investors have been leading the charge, followed by Singapore, Hong Kong and Japan.

The index of choice among Asian institutional investors is focused on the MSCI Pacific ex-Japan Index. This includes the developed Asian economies of Australia, Hong Kong, New Zealand and Singapore. Investors around the world often like to use enhanced strategies that encompass the world, as well as one for their home market.

Hong Kong or Singapore are too small, so Asian investors tend to go for an index encompassing the region's developed economies. However, Gekas says, "Asia Pacific ex-Japan just does not offer enough breadth as MSCI defines it.

"The crucial feature of the enhanced approach is that it requires sufficient breadth to ensure consistent returns. We tend to hold at least 50% to 75% of the names in our benchmark. We are not overweight in many, and operate by taking lots of very small bets."

Ideally, for the purposes of a regional equity enhanced index, SSgA would like to see Asia as a unit combining Japan and Australasia. Indeed, its North American and European clients have shown no qualms about investing into the region using this index structure.

Gekas is considering two solutions. One, SSgA can adopt a FTSE Asia ex-Japan index that includes South Korea as a developed country. The snag is that the vast majority of SSgA's clients follow MSCI, aside from investors in the United Kingdom.

SSgA may wait, however, because it believes MSCI is likely to add Korea to its Asia developed countries index too. The second possibility is to add Asian emerging markets to the mix.

Gekas says more needs to be done in terms of investor education about enhanced strategies. While Japanese investors seemed to fully comprehend the merits and mechanics of the product, Gekas says some Asian clients are focused only on absolute return strategies, and sometimes confuse this with enhanced.

"Perhaps they have been too bombarded by hedge fund managers," he sighs. Unlike in the US and Europe, where investors move passive mandates into enhanced in order to maintain a conservative posture but still cover fees and provide a little extra return, Asian investors are looking to shift out of active strategies – an indictment of traditional active management.