ASIA ex-Japan's equity markets may have suffered a rout with the rise in global risk aversion, but a survey of hedge fund investors has found that the region is a top pick for increased allocations in 2008, alongside the emerging markets of the Middle East and North Africa.
Expectations of performance from the Asia ex-Japan region are respectable, but not particularly strong. Instead, the top performer is expected to be the frontier markets of Middle East/North Africa, which is also a new addition to the survey by Deutsche Bank.
The worst expectations of returns are for US/Canada, Western Europe and China.
'Demand for investment and risk products has grown significantly, as shown by the high expectations investors have.' -Denis MacCarthy
Deutsche Bank head of equity sales Asia ex-Japan
The bank's Alternative Investment Survey polls over a thousand respondents from about 500 firms, representing nearly US$1 trillion in hedge fund assets and over US$4.5 trillion in total portfolio assets. Among the respondents, funds of hedge funds comprise the largest share of 40 per cent.
The next largest group polled were family offices, high net worth individuals and wealth management firms. Other respondents included pensions and endowments; banks, corporations and insurance firms; and consultants.
The damper is that only 7 per cent of investors feel bullish for 2008; they are more optimistic about next year. On the outlook for 2009, 40 per cent expect the global economy to improve; 23 per cent remain bearish and 37 per cent are unsure.
Over 30 per cent of investors are holding cash, comprising between 5 and 10 per cent of their hedge fund portfolios. Over half, however, plan to eliminate their cash holdings by March 2009. 'This would suggest a renewed willingness to make allocations to hedge funds,' said the study.
The overall hedge fund industry is expected to earn 7.5 per cent in returns in 2008, but respondents expect their own portfolios to earn 10 per cent.
Reflecting a renewed caution, investors indicated risk management as the third most important manager criteria, after performance and investment philosophy. In past surveys, the top criteria were the three 'Ps' - performance, philosophy and manager pedigree. The latter has slipped to fourth place in importance.
In portfolios, 58 per cent of investors would not consider applying leverage; 12 per cent are interested in leverage, but have not yet done so. The remaining 30 per cent are actively leveraging their portfolios.
Fewer investors are willing to seed hedge funds. In the latest survey, 52 per cent said that they were willing to be early allocators, compared with 77 per cent last year - 'confirming our view that investors are becoming increasingly unwilling to allocate to new launches, even to the right manager'.
In terms of initial allocations to hedge funds, the average ticket size has dropped somewhat to US$25 million from US$28 million in 2007. US investors make the largest allocation of about US$27 million, and the Asian allocation is half that at US$13 million.
Investors pick global macro as the strategy most likely to yield the best returns this year, the top pick by 61 per cent of respondents. Distressed funds and equity volatility are expected to be the second and third best, respectively.
Denis MacCarthy, Deutsche Bank head of equity sales Asia ex-Japan, said: 'Volatility in Asian equity markets has been particularly acute and we expect this to remain a dominant theme in the region for the remainder of the year. Demand for investment and risk management products that exploit this theme has grown significantly, as shown by the high expectations investors have for this strategy in 2008.'
Funds invested in asset backed securities are 'overwhelmingly' expected to be the worst performer.
In terms of strategies, 60 per cent of respondents indicated that they are looking to actively increase their allocation to distressed funds, a 'consistent opinion' across all regions. The credit crunch has caused spreads to blow out across a spectrum of credits, particularly investment grade. While spreads have since tightened somewhat, they remain relatively wide.
In particular, 33 per cent of pensions, endowments and foundations want to raise allocations to distressed funds. 'While this is lower than all the other categories of investors, this number is significant, given the stickiness of capital of these institutions.'
The strategy on which there seems little agreement is equity long/short. Some 30 per cent of respondents believe the strategy will fare well in 2008, and another 29 per cent feel it will be the worst performer.
This article was first published in The Business Times on May 14, 2008
