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Asia Pacific Intelligence

Preqin says growth in Asia Pacific credit market should create opportunities for credit hedge funds

Monday, July 08, 2013

A new study from Preqin finds that the Asia Pacific hedge fund industry is dominated by long/short equity hedge funds. The study reveals that these types of funds 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, the study finds, as the Asia Pacific credit markets continue to mature, opportunities abound for the region's hedge fund industry to further expand into the credit space.

The report says: "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."

Investors in the Asia Pacific region remain yield hungry which on top of increased trading options is another driver for fund managers.  "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" the study says.

Preqin's research finds that despite the booming Asia Pacific credit markets, the majority of investors (89%) prefer to maintain a global outlook when investing in credit hedge funds. Some 53% 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%).

A disappointing finding for the study is that 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. Some 60% 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, the study concludes.

This piece first appeared in Opalesque's Alternative Market Briefing.

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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