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Asia Pacific Intelligence

Survey finds Asian institutions consistently avoid hedge funds due to issues around performance, fees and credibility

Thursday, November 07, 2013

A survey by BNP Paribas Securities Services of major institutional investors in the Asia Pacific region, representing more than $2.2tln in assets under management and undertaken by KPMG has found that institutional investors in the region are prioritising an improved approach to risk.

Key findings included:

  • APAC institutional investors with combined AuM exceeding USD2.2tr unanimously note changing risk culture in their organisations
  • 63% of institutions across 11 APAC countries agree that financial crisis has changed their investment approach
  • Australia, Japan and Hong Kong asset owners favour risk budgeting when modifying their investment strategy
  • 60% mention regulatory risk reporting as having some or significant impact
  • 44% report asset allocation as having become more conservative
  •  Regulatory reporting requirements key challenge for Australia, Indonesia and Indian asset owners
  •  Chinese asset owners moving towards developing their own credit rating systems for investments

The survey found that asset owners in Asia Pacific have experienced a fundamental shift in attitudes towards risk since the financial crisis, leading them to favour more conservative investment and asset allocation strategies, and place an even greater focus on risk.

All 27 asset owners surveyed reported more emphasis on risk within their organisations in line with growing corporate governance and increased regulatory scrutiny in the region. Management teams and boards of directors of pension funds, insurers, sovereign wealth funds and other asset owners in the region are looking for more detailed information on risk and performance of their investments and asset managers, according to the research.

63% of respondents agreed that the financial crisis had changed the investment approach within their organisations, and almost half of those felt that their allocations had become more conservative - linking this to the overall risk-aware appetite of the organisation. Fixed income, or assets with fixed income-like qualities, was reported to be an area for increased investment as the region's asset owners were attracted to the stable cash flows and less volatile returns of those instruments. It also emerged that hedge funds were consistently avoided by respondents, following what they perceived to be weak performance and issues around fees and credibility in the region.

Of the respondents who chose risk budgeting as the most important consideration when modifying their investment strategy, 78% were from Australia, Japan and Hong Kong. They saw risk budgeting, when the investor targets a total level of risk by splitting risk across the portfolio, as a natural evolution in line with asset managers across the globe who - while continually pushing for returns - are more focused on creating a balance between risk and returns. In contrast, other respondents from emerging economies such as China, Indonesia and India prioritised performance.

60% of the asset owners indicated that regulatory risk reporting had "some" or "significant" impact on their organisation, hinting at the operational challenges that lie ahead with increasing regulation. Australian asset owners in particular, pointed to the upcoming issuance of the "Stronger Super" reforms by their government this year, indicating that they are gearing up for additional regulatory requirements.

Madhu Gayer, head of investment reporting and performance, Asia-Pacific, BNP Paribas Securities Services said, "Although the global economy is recovering and Asia's proved more resilient than most, it's clear that 2008 was a watershed for asset owners in Asia-Pacific with profound change in their attitudes towards risk. They face a number of major challenges to integrating risk culture into their organisations. Data management, regulatory compliance and reporting, as well as talent management are all factors contributing to the overwhelming expectation from institutional investors in the region that spending on risk and performance measurement will rise in the next three to five years.

Bonn Liu, Partner at KPMG China, noted, "Asset owners in the region are facing a number of really uniform challenges although some will resonate more strongly. What is clear though is that on one front regulation is increasing while risk efficient yields are becoming harder to achieve, pushing asset owners into new territory in terms of asset allocation."

The survey found that as they expand their investment scope, seek increased diversification and look to introduce more environmental, social and governance factors into their investment strategies, asset owners in the region will continue to boost their analysis and reporting capabilities. Almost 75% of the region's largest institutional investors expect to increase spending in this area and they see value in strengthening their relationships with their custodians and service providers to better face the challenges. This research demonstrates that while a number of Asia Pacific asset owners have made big strides in enhancing their capabilities, a lot more remains to be done.

This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.
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