Investors within the Asia-Pacific region have traditionally been more conservative when allocating to hedge funds compared to their global peers. Data from Preqin’s Hedge Fund Investor Profiles online service shows that 37% of institutional investors based in the Asia-Pacific region currently invest in hedge funds and these investors have a mean allocation of 9% of assets under management to the asset class. Australia-based investors form the largest proportion of these investors (32%), followed by Japan (28%), Singapore (13%) and Hong Kong (12%). Considering institutional investors globally, the mean allocation to hedge funds is 14%, suggesting that there is room for Asia-Pacific institutions to grow their hedge fund allocations in the future.
Although the differing allocations to hedge funds of investors in each region could be due to specific structural differences, data from Preqin suggests that investors in Asia-Pacific are catching up. Of the Asia-Pacific investors that are not currently active in hedge funds, 5% are actively considering making a first allocation to the asset class. In terms of investor type, insurance companies comprise 22% of investors considering making their first hedge fund allocation over the next 12 months. This is followed by institutional private wealth firms (wealth managers and family offices) and public pension funds, with both of these groups representing 19% of investors. Most of these potential new investors hail from developed countries, with South Korea making up one-third of the total.
The disproportionate amount of South Korea-based investors considering hedge funds is a reflection of the recent liberalization of the domestic hedge fund industry as well as robust capital flows from companies and pension funds as they seek to diversify away from conservative instruments to meet investment objectives. Government Employees Pension Service is one such pension fund in South Korea that is looking to make its maiden investment in hedge funds. It plans to allocate KRW 32bn to commingled global multi-strategy funds of hedge funds.
The Fund Searches and Mandates feature on Hedge Fund Investor Profiles indicates how Asia-Pacific investors are looking to allocate their capital over the coming year. Of those investors based in Asia-Pacific that have issued mandates, the vast majority (88%) have included a search for commingled single-manager funds. Pension funds are the most open to funds of hedge funds, with this investor type representing 42% of multi-manager searches. There is high demand for long/short equity strategies, with 34% of searches issued by Asia-Pacific-based investors including a long/short equity component. Investors also maintain a preference for macro and multi-strategy funds, with 29% and 15% of searches seeking exposure to these strategies respectively.
Going forward, two broad themes are likely to support increased investments into alternative assets within the Asia-Pacific region; the growing wealth of individuals together with the demographic trends of developed nations as its population continues to age. More investors, especially wealth managers and pension funds, are expected to diversify from traditional assets and increasingly move into hedge funds.