Asset owners in Asia ranked portfolio diversification as the top driver of their allocation strategy over the next six to 12 months, according to a recent survey by AsianInvestor's investment intelligence data platform, Asset Owner Insights.
In the extensive survey that covered 56 asset owners, 75% of institutional investors put portfolio diversification as the top driver of investment strategy, ahead of long-term capital growth, cash yield and sustainability.
In the hunt to diversify portfolios, one asset class stood out for asset owners in the survey.
“In our conversations with asset owners, they have consistently highlighted hedge funds as the most uncorrelated asset class for 2023, making them a key component in achieving their diversification goals," according to Kebelyn Lee, research manager at AsianInvestor.
About 82% of respondents, indicated they have and will maintain their existing exposure in hedge funds, while three entities stated that they plan to allocate more to hedge funds in 2024.
"The majority of respondents, around 75%, have maintained a conservative allocation of 0-5% to hedge funds," added Lee.
Still, family offices have a bigger appetite for hedge funds, Lee said.
"Family offices appear increasingly drawn to the allure of hedge funds, with a significant number allocating more than 15-20% of their portfolios."
Despite seeking portfolio diversification to break asset correlations in the face of geopolitical risks and potential persistently high inflation, over a third of asset owners remain cool on emerging markets (EM) and developed markets (DM) equities allocation and expect few changes in the coming six to 12 months, according to AsianInvestor’s survey.
“About 37% of respondents intend to moderately increase their exposure to EM equities,” added Lee.
Other experts agree with this expectation.
With earnings revisions turning and recession risks diminishing, the fundamental case for stocks is improving, according to Sylvia Sheng, global multi-asset strategist at JP Morgan Asset Management.
“We have upgraded our equity underweight to neutral, but only add equity risks either on dips or selectively in our preferred markets of Japan and the UK,” she told AsianInvestor.
“Although valuations are in line with long run average, the outlook for EM equities remains mixed as ERRs continue to disappoint and China’s reopening momentum is fading.”
Slower economic growth and stickier inflation are still the key risks for global markets.
Developed markets may be stuck with stagflation in the medium term, according to Wei Li, multi asset quant solutions portfolio manager at BNP Paribas Asset Management.
“In practice, hybrid hedging which includes both risk overlay and derivative hedging [and combines] linear and non-linear hedging together, performs better with lower hedging costs,” Li told AsianInvestor.
The current relatively low-volatility environment also creates a good opportunity to implement the hedging strategy, he said.
“Currently we are cautious on DM equities and are constructive on EM Asia. No matter what the market environment is, investors should always put on hedges to manage risks,” said Li.
For more information on our in-house research insights and for a demonstration of our asset owner intelligence platform, please reach out to Kebelyn Lee at kebelyn.[email protected] and Tim Cresner at [email protected]