Asian hedge funds are struggling to benefit from strong investor interest in the region in the face of patchy liquidity, country-level restrictions and general market jitters over the U.S.-China trade war.
The Asia Pacific was the top region identified by investors globally in 2018 and 2019 for increased exposure to hedge fund investments, a JP Morgan survey showed, reflecting demand for exposure to strong economic and demographic trends.
But the promise isn’t turning into growth of assets under management (AUM) in Asia. Since the industry in Hong Kong started its annual Sohn conference in 2014, where hedge funds pitch investment ideas, AUM at Asia’s hedge funds have fallen 10% to $108 billion, according to HFR Research. Globally, similar assets have increased 11.8%.
“There is a large amount of demand from international investors for Asian alternatives, and China in particular, but this is not fully flowing through into investment decisions or checks being written,” said Jonathan Jenkins, head of equity sales and prime distribution for Asia Pacific at Credit Suisse.
Hedge fund managers said this is in part because of limited liquidity in Asia-Pacific financial markets outside of North Asia, and a shortage of hedge funds with both capacity to take in additional funds and which meet the stricter due diligence standards of some global investors.
The U.S.-China trade war is also acting as a dampener for market investment overall, serving as another drag on the ability of the industry to grow.
Headline-grabbing ideas pitched at Sohn conferences, held globally, have included a suggestion to short Lehman Brothers four months before the bank’s collapse precipitated a global financial crisis.
The 2019 Hong Kong conference takes place on Thursday.
“At the first conference two people pitched this little company called Alibaba, which they said attendees might be able to get exposure to in public markets in the future,” said Seth Fischer, founder of Oasis Management, who set up a hedge fund conference in Hong Kong in 2013 that became the Sohn conference the next year.
China and japan
Managers and advisers are bracing for more financial market volatility - which can benefit hedge funds if they have sufficient market tools to trade the price swings.
Deep markets are key, so China and Japan tend to dominate trading and hedge fund discussions, although China has restrictions on the ability to short securities - or bet on falling prices.
“We’re preparing for clients to show interest in hedge funds with low or negative correlation to risk assets, such as macro strategies, which did well during the global financial crisis, but they haven’t asked for these yet,” said Thor Monsen, Asia Pacific head of hedge funds at Citi Private Bank.
Vivian Chang, chief executive at China-focused hedge fund WT Asset Management, sees potential opportunities as China struggles to revive economic growth. The economy may be growing much faster than developed economies, but the pace of expansion has dropped to its lowest in almost three decades. [nL3N1ZL4KV]
“We try to identify the inflection point, where we can find opportunities on the short side,” said Chang, whose firm invests in onshore and offshore-listed Chinese companies.
“But at the same time, China is still developing and growing, so there are abundant opportunities on the long side too.”
Taking a short position on securities in China is highly restricted by regulators, leaving hedge funds to focus on Chinese companies listed overseas, such as in Hong Kong, if they want to employ bearish strategies.
Even in Japan, the region’s deepest and most accessible market, the presence of hedge funds is modest compared to Europe and North America.
“Asia feels a little different to the U.S. where there are so many analysts and hedge funds looking at every company and every announcement,” said Aaron Stern of Fir-Tree Partners in New York, which hit the headlines last month after raising its stake in Kyushu Railway Co and urging the company to buy back shares.