North America-Based Hedge Fund Investors Accept Increased Risk Associated with Asia-Focused Funds

by Mark Cunha

  • 07 Apr 2015
  • HF

Institutional investors have exhibited a significant preference for Asia-focused hedge funds, as they have recently provided higher returns at an increased volatility compared to the industry average. North America-based investors have historically shown a strong inclination towards Asia-focused hedge funds compared to institutional investors from other regions. Asia-focused funds represent a significant portion of the asset class and can provide opportunity for institutional investors willing to take on the increased risk.

Currently, Asia-focused hedge funds make up 13% of all hedge funds tracked by Preqin’s Hedge Fund Analyst online service. Over the last 12 months, Asia-focused hedge funds generated +20.99% as of February 2015, significantly more than Preqin’s All-Strategies Hedge Fund benchmark of 4.71% for the same period. However, Asia-focused hedge funds also generated an annualized three-year volatility of 8.12%, compared to the industry average of 3.62%, suggesting that investors seeking potential outsized returns in this region must be able to tolerate the higher degrees of risk associated with Asia-focused hedge funds. 

Preqin’s Hedge Fund Investor Profiles database currently tracks 1,085 institutional investors with an appetite for investing in Asia-focused hedge funds, representing approximately 22% of all hedge fund investors globally. Sixty-one percent of investors that reported a preference for Asia-focused hedge funds are based in North America, showing how sophisticated North America-based firms are attracted to the potential high-risk, high-return profiles of Asia-focused hedge funds.

Foundations represent the largest proportion (31%) of North America-based institutional investors with a preference for Asia-focused hedge funds. Foundations are followed by private sector pension funds (20%) and fund of hedge funds managers (16%). By contrast, fund of hedge funds managers represent 55% of Europe-based investors that have a preference for Asia-focused funds.

Fifty-four percent of North America-based institutional investors with a preference for Asia-focused funds invest directly in hedge funds. Investors that prefer investing in single-manager funds, as opposed to funds of hedge funds, tend to be larger investors capable of performing greater due diligence. The most common strategies among these investors are currently long/short equity, multi-strategy and event driven; preferred by 89%, 75% and 74% of these investors respectively.

Over the last 12 months, Asia-focused hedge funds have demonstrated their ability to generate outsized returns compared to the rest of the industry, with a large proportion of North America-based institutional investors expressing a preference for the region despite Asia-focused funds exhibiting higher volatility. Specifically, North America-based foundations and private pension funds exhibit this trend. It seems that these investors are willing to accept the high volatility in return for potentially high rewards.

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