Gauging Asian investor hedge fund appetite

This post first appeared in HFM Week on 7th September 2016: 

There has been a huge amount of coverage about the decisions of Calpers, Nycers and the New Jersey Investment Council to get out of or reduce their hedge fund allocations, but the big move into hedge funds by Asian institutional investors this year has not been so widely reported.

Korea Teachers’ Pension, the country’s second largest scheme, announced it was making its first foray into hedge funds this year. Japan Post Bank said it was going to increase its hedge fund allocation, and Chinese and Taiwanese insurers are also expanding into alternatives.

The region’s traditional hedge fund investors – Japanese pension funds and banks, Australian superannuation funds and sovereign wealth funds – are also still committed to the space. A recent Credit Suisse hedge fund investor survey found 86% of Asia-Pacific respondents said they would likely make allocations to hedge funds during the second half of the year, compared to 76% of US investors and 64% of those in EMEA.

There are several drivers: the increased liberalisation of domestic rules on alternatives allocations has encouraged Chinese investors to look abroad, while the South Korean government has said it will raise the overseas and alternative investment proportion in seven state-run pension funds.

There is also a macro element: institutional portfolios in Asia, which have had heavy sovereign debt and domestic equity allocations, generated low returns in recent years, resulting in an increased diversification and alpha appetite. This has translated to a greater demand for alternatives and hedge funds in particular.

Engagement and education are key when considering marketing in the region, but it is important to make a distinction between active marketing and broader brand-building and thought-leadership. Active marketing – approaching investors – is subject to local regulations across the region which typically require registration with a regulator and on-going compliance and reporting requirements.

Asia is a patchwork quilt of different regulatory regimes, so legal advice should be sought on what can and cannot be done in each jurisdiction in terms of active marketing. For managers that do engage in active marketing, it is worth taking a long-term approach – firms that have been successful in the region are those that have demonstrated long-term commitment to it. Flying in and out on occasional trips won’t work; you need to either have a local presence or frequently visit the region.

Building your brand through press coverage can be an alternative to active marketing or support it, and can help generate reverse investor enquiries. Hedge fund firms can engage in broader brand-building activities across the region without being subject to local regulatory requirements as long as they do not appear to promote their fund(s) by specifically referring to them or their returns. Managers can talk about markets and individual sectors, or produce educational or analytical thought-leadership material such as white papers which can be discussed with the press.

It is important to think strategically about what kind of profile you want to build in individual jurisdictions and then choose the appropriate outlets. English-language global business news sources may be widely read in Australia, Hong Kong and Singapore but in Japan, China and South Korea the local-language press needs to be engaged. This involves establishing an angle relevant for the audience in question.

This type of activity needs to be undertaken with care, however, as alternatives are still not widely reported on in many Asian jurisdictions. But that said, there is not the hostility to alternatives found in some other jurisdictions globally.

With pools of investment capital in Asia and allocations to alternatives set to increase substantially in the years to come, long-term, strategic engagement with the region is likely to be rewarding.

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