Asian institutions set to boost hedge fund flows

Hedge funds may have suffered a lot of bad press globally in recent years, amid outflows, disappointing performance and concerns over fee levels – but Asian institutions are set to raise their exposure to the asset class, according to industry experts.

Some very large Asian institutions expect their alternatives allocation to rise from around 5% to 20% over the next three to five years, said Effie Datson, global head of product for alternative investment solutions at State Street.

If the current trend continues, the bulk of that increase is likely to go into private equity, and possibly also real estate or infrastructure, London-based Datson told AsianInvestor. But if the hedge fund allocation were to rise from 2% to 6%, that would represent multiple billions of dollars, she added.

Certainly, Seoul-based institutions such as Korea Post and National Pension Service have been ramping up their hedge fund exposure recently – the latter for the first time.

Admittedly, the first half of the year saw net outflows from hedge funds globally of $23.3 billion, according to Hedge Fund Research Inc (HFRI), but some investors redeemed far less than others found Credit Suisse’s mid-year survey of hedge fund investor sentiment, released last month. Around a third (31%) of pension funds and a quarter of endowments/foundations said they had not made any withdrawals from hedge funds in the first half, as against 13% of family offices.

Improving sentiment

Moreover, 86% of Asia-Pacific investors said they would likely make allocations to hedge funds during the second half of the year, according to the poll. The same was true for 76% of investors in the US and 64% of those in Europe, the Middle East and Africa. 

Sentiment is certainly improving on hedge funds in Asia, and asset owners are asking more questions about the asset class this year than last, noted Adeline Tan, Hong Kong head of investment advisory at Mercer.

In respect of a traditional allocation of 60% to equities and 40% to fixed income, Tan suggested they should use one third of their equity allocation for alternative strategies to boost returns. Mercer recommends putting a higher proportion in hedge funds than infrastructure and real estate, she added.

It’s logical that Asian investors will raise their hedge fund exposure, because they are currently under-allocated, accounting for only 8% of global hedge fund assets, said Ryan Korinke, head of the hedge fund platform at US asset manager Pimco.

In Asia, Japan is accounting for the biggest uptake of alternatives among institutional investors, followed by China and Korea, he added.

Performance concerns

As for the concerns over  disappointing hedge fund returns – the HFRI Index posted three-year annualised returns of 3.6% as of end-2015 – Korinke said it was not an accurate representation to simply quote HFRI when analysing performance. 

Most of the firm’s investors invest in 20-40 hedge funds, he said. Pimco randomly selected 20 funds from the HFRI universe with more than $500 million in AUM and repeated the process a thousand times. This resulted in median three-year returns of 6.5%, which is not too far off what investors are looking for, Korinke noted.