Asian institutions doubtful over hedge funds

Five years after the 2008 financial crisis, Asian institutional investors are more wary of being caught out by liquidity risk and over-concentration in asset classes when making their asset allocation.

That was one finding of a survey of 27 Asian organisations released yesterday by BNP Paribas Securities Services, which commissioned KPMG to interview these asset owners between April and June.

Around six in 10 (63%) of respondents said their investment approach has changed as a direct result of the changing market conditions and regulatory requirements post-crisis. They also indicated that there has been an ever-increasing need to take account of risk in their investment process. 

This mentality has translated into an inclination towards alternative asset classes with fixed-income-like returns and stable cashflows – such as infrastructure and real estate – rather than hedge funds, says Madhu Gayer, Asia-Pacific head of investment reporting and performance at BNP Paribas Securities Services.

They are wondering whether hedge funds really provide differentiated alpha, he adds, referring the high correlation of such strategies’ returns with those of long-only managers during the 2008 crisis.

Gayer says these asset owners are increasingly looking more specifically at where to allocate their risk exposure, at a more granular level, rather than going with an 80-20 split between fixed income and equities.

For example, within equities, asset owners may look to identify sector that are ‘value plays’ or those that they can profit from via momentum investing, a strategy that rides on existing trends in the market. Based on these risk factors, institutions will regularly look to re-adjust their allocations.

However, respondents did not clearly indicate they had become more conservative in their investment approach.

Over the next three years, 41% of them say they plan to outsource more investment management, while 41% that their current model will not change, with 18% saying they plan to outsource less.

“For example, for sophisticated sovereign wealth funds that are looking at private equity – an asset class that is considered esoteric – they want to do it themselves [rather than outsource to asset managers] because they feel they have the price-making power [to go direct] and don’t need asset managers,” says Gayer.

The respondents included sovereign wealth funds, central banks, treasuries of state-owned enterprises, pension funds and insurance companies. They were located across 11 countries and have combined assets under management of $2.2 trillion.