Hedge fund exposure to India and China is likely to soar this year, according to a new survey of managers.
It comes as the recent unpredictable performance of emerging-market stocks is viewed by market players as an opportunity for such hedge funds to exploit.
And despite stronger event-driven strategy performance in the first two months of 2015, some say global macro will be the strategy to back this year.
Investors planning to increase exposure to India jumped from 4% of respondents (by AUM) last year to 26% this year according to Deutsche Bank’s 13th annual alternative investment survey. China-focused hedge funds also saw a rapid increase – from 11% of AUM in last year’s survey to 25% this year.
The hedge fund respondents to the Deutsche Bank survey have some $1.8 trillion in assets under management.
The recent idiosyncratic performance of emerging market equities is seen as a big opportunity for hedge fund managers. “We prefer to play emerging markets from the global macro perspective” rather than invest in country-focused equity hedge funds, said GAM portfolio manager Anthony Lawler.
Global macro funds invest across asset classes – from credit to currencies – betting on regional or global macro trends. In contrast, equity hedge funds focus exclusively on equities and bet on whether stocks will go up and down (long/short) or sideways (market neutral).
Hong Kong-based hedge fund consultant James Manders disagreed that global macro is the favoured strategy. He said long/short equity, event driven and then global macro, in that order, are what the prime broker surveys indicate investors are looking for.
That includes Asia-focused hedge funds, which are more equity-focused than strategies run outside the region.
Credit Suisse’s annual survey also found a very strong demand for Asia-Pacific strategies, with 28% net demand.
GAM’s Lawler said that historically there has been a high correlation between macro, trend following and relative value strategies. While global macro managers typically attempt to anticipate a new trend developing, CTA/managed futures are the opposite – by definition they are trend followers.
One factor behind this is that CTA’s strong performance last year was driven by fixed income market returns, which may not be available this year.
HFR’s macro/CTA index – which lumps global macro and CTA together, given their high correlation – achieved a 0.7% year-on-year return in February, far behind relative value (2%), equity hedge (2.3%) and event driven (2.7%).
Event driven (ED) was the strongest performing strategy in February. GAM’s Lawler remarked that he was cautious about event driven strategies this year given overcrowding in trades.
“The indicators were that last year should have been a good year,” he said, but the strategy suffered in the fourth quarter, as the impact of the oil price decline fed through to energy firms, and expected tax inversion M&A deals did not pan out.
“It should be a good year for event driven managers who have a fresh book, with no legacy deals,” he said.
Both Credit Suisse and Deutsche Bank’s surveys predicted that 2015 would see hedge fund AUM pass $3 trillion for the first time ever.