Global Hedge Fund Investors With $812 Billion Prefer Asia

A Credit Suisse survey of over 200 institutional investors showed Asia-Pacific was the most-sought after region.

Global Hedge Fund Investors With $812 Billion Prefer Asia
A screen displays the Nikkei 225 Stock Average figure at the Tokyo Stock Exchange. (Photographer: Kiyoshi Ota/Bloomberg)

Hedge funds focused on Asia are predicting a surge of new money from North America and Europe as investors move away from overvalued U.S. assets to tap the early pandemic recovery in China and other parts of the region.

The GameStop Corp. investing craze that pitted retail traders against hedge funds may add to the Asian flows, with investors seeking to avoid similar losses from short-selling squeezes, according to hedge fund companies including APS Asset Management.

A Credit Suisse Group AG survey of more than 200 institutional investors with $812 billion in hedge fund assets showed Asia-Pacific was the most-sought after region with 55% net demand, the highest in over a decade. By comparison, net demand for North America stood at just 20%. The figures measure the share of investors planning to raise allocations minus those planning to trim.

“This year we are going to see strong net inflows based on our conversations,” said Richard Johnston, Asia head at Albourne Partners in Hong Kong. “The areas we are seeing most demand for are China equities, low-net hedge funds and private credit.”

The investment shift could help foster growth in Asia’s relatively small hedge fund industry, centered largely in Hong Kong and Singapore. Investors around the world are trying to find ways of profiting from the region’s economic growth, and Asia hedge funds have outperformed global peers.

Johnston, who advises investors on alternative investments, said some North American institutions are pushing China allocations to 15% to 20% of their overall investments in a range of asset classes.

Total assets under management by Asia-Pacific based hedge funds rose 20% last year to $155.6 billion, according to Preqin data, and firms like Dymon Asia expect more inflows this year.

“Once the lockdowns come off, which could be later this year, then I think it will be very healthy for the broad industry of hedge funds out here in Asia,” said Dymon Asia founding partner Danny Yong in Singapore, whose fund manages about $5 billion.

The surge in monetary and fiscal stimulus in North America and Europe may also push some investors to park more money in Asia, skirting the frothiness of U.S. markets, fund managers said. Regulatory changes that have made it easier for hedge funds to invest in China are also boosting demand.

“The U.S. and Europe have thrown in the kitchen sink in terms of a liquidity and easing perspective so you have seen those asset markets have over-earned,” Yong said, adding that investors in those regions were previously reluctant to move money with strong gains at home. “Ultimately it’s about the return until such point – and I believe that 2021 could be that year – where Asia significantly outperforms.”

China’s benchmark CSI 300 Index has topped the S&P 500 for the past two years, and was outpacing the U.S. again in 2021 before a recent pull back. The gauge is down 3% this year, compared with a 4.2% gain in the U.S. index.

GameStop refugees

APS Asset Management Chief Investment Officer Kok Hoi Wong, whose firm manages about $3 billion, predicted some of the institutional investors who got burned backing hedge funds that shorted GameStop and AMC Entertainment Holdings Inc. would redeem some money and redeploy a portion to Asia. The lack of popular forums for retail investors like WallStreetBets and platforms like Robinhood Markets Inc. mean similar squeezes are less likely to happen in the region.

“It’ll probably start in the second or third quarter,” he said. “But whether you’re operating in Asia, the U.S. or anywhere in the world you’ve got to make sure your risk-controls are rigorous enough to prevent you from getting into that kind of trouble.”

APS tries to avoid overly-popular positions - also known as ‘crowded trades’ - and only shorts companies with large market capitalizations to prevent the type of swings that punished hedge funds trying to short AMC and GameStop, he added.

Still, Dymon’s Yong warned similar retail-driven short-squeezing events are on the cusp of coming to Asia. Its first line of protection is to run a multi-strategy fund with low correlation to equity indexes. A second strategy is to make 1,000 short bets and 1,000 long wagers -- none worth more than 1% of a company’s market value -- to lower the potential impact of a single, major event.

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