Our Insights

June 2014

Investing in Asian Hedge Funds: Opportunities and Challenges

Benjamin Low, Chee Loong Chong, Mark Dalton, Jwo Shyang Soh

  • The Asian hedge fund universe is more heavily skewed toward equity managers compared to global indexes, and also has higher returns and volatility. Capital markets development has led to a growing trend of  diversification toward event driven, fixed income, macro, and multi-strategy funds. The industry is dominated by large firms managing the majority of assets.
  • Long/short equity and macro strategies currently present the most interesting prospects. Opportunities exist within long/ short equity because the investable universe is larger than both western Europe and the United States, and a growing number of stocks are being sold on exchanges outside Asia where shorting is permissible. Macro managers have a wide opportunity set in the region. We are less excited about event driven and liquid credit strategies. Should investors be comfortable with managers that specialize in the less-liquid credit spectrum, this can be an attractive space to explore.
  • For investors interested in Asia-focused hedge funds, the following factors are key considerations when evaluating managers:
    • Proficient operational staff;
    • Limited fund capacity that ensures efficient capital deployment into investment opportunities with the most compelling risk-reward vis-à-vis attracting and incenting the right talent;
    • Appropriate fund liquidity terms that fit the profile of the strategy adopted and the underlying securities selected also attract the appropriate investor base;
    • An experienced investment team, preferably with local language capabilities; and
    • A robust investment process and prudent portfolio construction that seeks to mitigate the impact of elements such as basis risk, liquidity constraints, and unintended risks.