Asian institutions seek alternatives, shun developed markets

Asia ex-Japan institutions are turning to alternatives and currency hedging in a bid to generate returns amid a low-return, yet volatile market environment, according to a survey by Pyramis Global Advisors, the institutional investment subsidiary of US fund manager Fidelity.

Institutions in Asia ex-Japan cite risk management as their priority, and 61% say they are diversifying into alternative asset classes, finds the 2011 Pyramis Asian Pulse Poll. High-yield and emerging-market equity investments are being pursued by 40% of all respondents, while 55% are using currency hedges.

Investors are mitigating volatility in an alternatives portfolio through diversification, says Young Chin, chief investment officer of Pyramis, which has $176 billion in AUM. Institutions have been increasing real estate and private equity investments – which can take years to generate returns – while adding long/short equity and global macro fund allocations to take advantage of market volatility and provide liquidity, he notes.

Japanese institutions – which are twice as concerned about volatility as their Asian peers and almost four times as concerned as those in Europe – are taking a different tack. They are increasing fixed-income allocations (61%), while 42% are adopting a liability-driven investing approach. Only 16% were likely to use currency-hedging strategies.

Meanwhile, asset managers are set to benefit from greater allocations from Asia ex-Japan institutions, 39% of which are planning a portfolio shift in the next one to two years that will increase their exposure to Asia, while reducing allocations in developed countries. Conversely, 23% of Japanese institutions say they will decrease their domestic equity allocation.

Investors across the region plan to increase their allocations in equity and fixed income in the Asia, emerging markets and global categories, according to the survey.

Ninety-five institutions were polled across China, Hong Kong, Japan, Singapore, South Korea and Taiwan, which collectively hold more than $1.1 trillion in assets.