The Asia-Pacific hedge fund industry is dominated by long/short equity hedge funds. These vehicles make up over 40% of the funds managed by hedge fund managers from the region, while various forms of credit-based hedge fund strategies combined, such as long/short credit and fixed income, make up only 19% of the funds in the region. However, as the Asia-Pacific credit markets continue to mature, there are opportunities abound for the region’s hedge fund industry to further expand into the credit space.
Asia-Pacific credit markets are poised for another vibrant year, with factors that drove the record-breaking credit issuances in 2012 still in place. Interest rates remain low in the region, and governments such as China are moving to reform their credit markets in order to support their development. Corporate credit and high yield are also expected to remain high and are widely anticipated to be the next growth engine of a deepening Asia-Pacific credit market. An expansion of the region’s credit markets will mean ample trading opportunities for credit-focused hedge funds in the region.
On top of increased trading options, another boon to fund managers is the fact that investors in the region remain as yield-hungry as ever. An expansion of the hedge fund industry into the credit space will provide investors with an opportunity to diversify away from holding just equity-focused hedge fund strategies, and will thus drive demand for credit-based hedge fund strategies.
Despite the booming Asia-Pacific credit markets, the majority of investors (89%) prefer to maintain a global outlook when investing in credit hedge funds. Fifty-three percent of investors maintain an interest in the North America region, while 48% will look to gain exposure to Asia. Strategically, the majority of investors in credit-based hedge funds prefer investing in long/short credit funds (45%), followed by fixed income arbitrage (30%) and fixed income (21%).
When looking to invest in credit-based hedge funds, investors in the region have a strong preference for investing in commingled direct hedge funds, with over 80% of the investors showing a preference for the fund structure. This is followed by commingled funds of hedge funds (50%) and direct managed accounts (14%).
Though the Asian credit markets do provide abundant trading opportunities, fund managers looking to set up new funds and to fundraise in the region will do well to note that 63% of these investors in the region will not provide seed capital to new funds. However, they are more open to investing with emerging managers, with 57% of them being open to investing with managers with trading experience of three years or less. Sixty percent of investors are also open to investing with spin-off managers. As such, fund managers will do well to build up a track record before opening it up to outside investors.
With strong institutional investor interest and favorable macro-economic factors driving the industry, conditions are ripe for the Asia-Pacific hedge fund industry to further mature and expand into the credit space.