ETFs now top choice for investing in Asia; hedge funds gain ground

Exchange-traded funds are overtaking direct equity investing as the most favoured method of allocating to Asia, while hedge funds are tipped for a big rise in popularity, according to AsianInvestor and Clifford Chance’s 2016 annual survey* (see figure 1).

Meanwhile, although China is still expected to be the most popular investment destination in the coming 12 months, its appeal has waned, in favour of Asia ex-Japan, India and North America allocations (see figure 2).

Stock-buying blues

In last year’s poll, the region’s asset management industry predicted global investors would mainly allocate capital to Asia through equity capital markets, ETFs and private equity funds.

This year’s survey, conducted in May and June, tells a different story. It reveals that buying stocks has become distinctly less attractive than a year ago (see figure 1). This drastic retreat means ETFs have overtaken direct equity investment as the most popular strategy for investing in Asian assets.

Matthias Feldmann, partner at Clifford Chance, said: “Some of the results reflect a safe haven strategy for managers badly pummeled by the volatile markets last year – this insecurity may prevail for a while.”

While passive investment is predicted to dominate, 225 of the region’s top asset managers, owners, distributors and banks also believe appetite for hedge funds, distressed/opportunity and private real estate funds will yield more opportunity over the next year than in 2015.

Hedge funds have seen a particularly strong jump in terms of expectation of where Asian investment flows are expected to go. “It is interesting to see hedge funds in high demand, after having been the focus of criticism over the last few months,” said Feldmann.

According to Eurekahedge, Greater China hedge funds posted the best performance regionally last year (+8.98% versus +6.26%) and witnessed net investment inflows of $2.4 billion.

While alternatives such as hedge funds are in vogue, hedge funds of funds are not, dropping to 7.8% of the vote from 18% last year. Private equity fund of funds also saw a sharp drop on 2015 numbers.

The reasons for this are unclear, but it could indicate a desire for asset owners to target specific managers and strategies rather than give the keys to their assets to fund selectors.

“Distressed debt, real estate and commodities are the asset classes to watch this year,” concluded Kai Niklas Schneider, partner at Clifford Chance.

China concerns

Now in its fifth year, the survey sought to establish the vision and appetite for investment into Asia. Given recent market volatility and concerns over regional growth, sentiment has clearly shifted.

China offers the prime example. Asked which geographies would receive the most capital over the next 12 months, 52% of those surveyed say China (including Hong Kong), down from 65% last year.

That said, respondents are broadly more buoyant about Asia as a region (excluding Japan) – 36.4% feel the region would receive the most capital from investors, an increase of 13.3 percentage points over last year.

North America also gained ground, with 49.7% of respondents believing it will receive the most capital over the next 12 months. Its growth has been slow but stable.

*We will publish further findings from the survey in the coming week. The full write-up and graphs appeared in the July issue of AsianInvestor magazine.