Equity long/short has traditionally been the strategy of choice for Asian hedge funds and investors, particularly wealthy individuals, but in recent years a shift has taken place.
Global macro strategies are heading the pack when it comes to attracting capital, and US pensions are among the most aggressive in terms of raising allocations, notes Kier Boley, head of equity hedge investments for GAM's multi-manager business.
While risk appetite and investment duration has increased over the past couple of years, he adds: “What is frustrating for equity-hedge managers is that investors are buying fixed income, such as structured credit, but that demand hasn’t rolled into equities as it traditionally would do.”
It is the fourth year in a row that investors have shown strong interest in macro-related strategies, says London-based Boley. That has contributed to a trend of home-grown macro managers in Asia.
“The reason people like them has been that one of the legs of their trade will be in the region,” he adds. For instance, some managers have done well in capturing China exposure.
Central banks in Asia-Pacific have had to start cutting rates quicker than many expected at the start of the year, as they’ve seen domestic growth slow, he notes.
“We've seen that happen quicker in Asia, and local managers have been able to capture it quicker than macro managers in, say, the US. In short, local Asian managers have caught the rate-cut trend earlier than others."
However, some larger Asian managers had soft-closed to new money as of the end of 2011, says Boley, meaning the next tier of managers with good performance are benefiting. “The select leading few with strong infrastructure and decent asset size will see flows, mostly from US institutional money.”
Indeed, it is such entities – more now than private clients, a more traditional source of hedge fund capital – showing growing interest in Asian funds, he says.
US retirement schemes have had a relatively good experience with alternative investments so far, notes Boley. They started allocating small sums to hedge funds about five years ago (less than 5%), but are starting to boost that exposure, perhaps as much as double.
The first investments were very US-centric, but these pensions are seeking lower correlations to existing assets now so are looking at international holdings, says Boley.
He sees "a clear bifurcation” of the industry when it comes to allocating to hedge funds. On the one hand there is the typical approach whereby institutional investors conduct the traditional beauty parade of managers, looking at operational structure, AUM and track record etcetera.
The other, increasingly common, method is for groups such as GAM to build customised solutions for institutions that are different from traditional fund-of-hedge-fund-type businesses.
“The advantage is that we won’t require the same length of track record that a traditional institutional RFP might ask for,” he notes. “After three years and having reached a certain AUM, funds tend to be closed to new money.
“They will still need decent infrastructure and to pass our due-diligence tests on investment processes,” says Boley, “but may only have a track record of 18 months or so.
“We will still create commingled funds, but where a strategy is more plain vanilla or more liquid, we may prefer to go direct to individual managers,” he adds. “It may be that an investor wants Japan equity exposure specifically and we choose a single fund rather than a fund of funds.
"You don’t need four or five managers all doing the same thing with a correlation of 0.8 or 0.9, that’s a waste of resources."
To this end, GAM hired Anthony Lawler from Man Group in a newly created, London-based role late last year, with a mandate to tailor alternatives allocations for institutional clients.