Blog

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.

Continue browsing industry reports, publications, conferences, blogs and more on Preqin Insights