Japan to lead Asian allocations to hedge funds

Japanese institutions are expected to lead regional allocations into hedge funds on a global basis, and 43% of such investors have open mandates to invest in Asia-focused strategies, according to a new Preqin survey.

Global- and Asia-focused hedge funds and those with a large AUM are likely to see the biggest inflows from the region, with long/short equity cited as a favoured strategy.

Of the Asia-Pacific investors with open hedge fund mandates, 30% are from Japan, followed by Singapore (21%) and Australia (16%).

Overall, 41% of Asia-based institutions surveyed in Q3 2013 say they plan to raise their hedge fund allocations over the coming 12 months, with 45% expecting to maintain their investments. Only 14% of investors aim to reduce their exposure.

Preqin did not provide estimates as to the amount of capital that could be allocated to the asset class as a result of the findings.

Global hedge funds account for the majority (70%) of open mandates to the asset class, with those focusing on Asia garnering 43%, North America 23% and exposures to Europe and emerging markets 20% and 8%, respectively.

Insurers and wealth management firms each account for a 14% share of open hedge fund mandates in the region, while Asian funds of hedge funds (FoHFs) and private pensions each comprise 12%.

The FoHF ratio, while small compared to the overall total, is encouraging for Asian hedge funds, which are typically their core focus. Other investor classes in Asia – which include public pensions, sovereign wealth funds and endowments – each have a small share of open mandates, although collectively account for 60% of the total.

Preqin notes that Asian insurance firms are an attractive target for fund managers, which plan to allocate an average of $68 million per strategy.  

On the other hand, this means that insurers will likely target funds that are large, at least near to the billion-dollar range. This is due to the fact that institutions typically avoid having their capital comprising more than 10% of any single fund’s total AUM.

In terms of strategies, 37% of Asia-based investors had open mandates for long/short equity funds, followed by macro (29%), long/short credit (26%), fixed income (20%), event-driven (17%), managed futures (17%) and multi-strategy (14%).

The enthusiasm for long/short equity matches that of global investors in a survey by Credit Suisse, which names the strategy as among the most favoured.

Asian investors are also falling in line with another trend, with 81% planning to directly invest in single-manager funds, while 35% intend to invest in FoHFs. Direct hedge fund investments have been growing post-crisis, as institutions seek higher returns and closer control over their portfolios. 

Preqin also surveyed investors globally on their view of Asian hedge funds, and found that only 20% of institutions outside of Asia had a preference to the region.

Some of the challenges cited by overseas investors include the fact that there was smaller choice of funds in Asia (53%), concerns over performance (35%), lack of a track record (29%) and less developed infrastructure (29%) compared to institutional-grade funds.

However, the outlook for future allocations to Asian hedge funds is generally optimistic, with 53% of investors located outside of the region intending to increase their exposure to Asia in the coming 12 months.