Asia-based family offices look set to increase their allocation to hedge funds in the second half of the year, as many shift towards active investment in Asian equities.
Family offices are typically cautious about hedge funds, and their clients tend to be more oriented towards wealth preservation. However, Credit Suisse’s mid-year survey of hedge fund investor sentiment found that 84% of the family offices it interviewed globally were likely to increase their allocations in the second half of the year, bucking a longstanding trend away from active management and towards passive strategies.
‘Because valuations are expensive, markets are at an all-time high and also more importantly, central banks are raising interest rates, more people are thinking that yes, at this point, it makes more sense to be an active stock-picker,’ Michael Preiss, executive director of multi-family office Taurus Wealth Advisors, said in an interview. Taurus Wealth Advisors offers actively managed certificates based on five or six hedge fund strategies.
‘If you are very happy with the performance of traditional assets you will tend to disregard hedge funds,’ said Karim Mrani-Alaoui, CIO at a Singapore-based single family office. ‘But if you feel that most traditional assets are unlikely to perform in the coming few months and you expect market correction, you may switch to hedge funds.’
Asian hedge funds may benefit from this shift, especially those running equity long/short strategies. According to Eurekahedge data, Asian hedge funds, which saw $3.4 billion in outflows in 2016, have already seen $1.5 billion in inflows this year.
‘Investors have mostly been targeting equity long/short strategies and greater China, Asean and Asia ex-Japan mandates,’ Mohammad Hassan, head analyst, hedge funds at Eurekahedge, told Citywire Asia.
According to Hassan, 39% of Asian hedge funds are in equity long/short strategies and they tend to focus on Asian equities, which are currently in favour among Asian investors. Family offices in the region are investing in hedge fund managers in Singapore and Hong Kong, with over 10 years of experience, who have been actively allocating to Chinese equities. Some macro strategy hedge funds run by Asian managers are also attractive to family offices, he said.
In the past, Asia-based hedge funds have had a poor reputation among global investors. Hassan said concerns over quality are misplaced.
‘Asian hedge funds have outperformed global mandates in the past five years except for 2016,’ he said. ‘I would argue that the talent pool there in Europe and North America is overcrowded. A lot are underperforming and only a few guys are actually generating alpha for you. In Asia, it’s not that crowded.’
Data from research firm eVestment shows that China-focused hedge funds have gathered more than 17% in returns year-to-date, beating many developed market peers. Asia domiciled hedge funds have made 8.5% since the start of the year beating European, UK and US hedge fund managers, according to eVestment.
Adrian Worth, research consultant at consulting firm Mercer said that Asia hedge funds have a place in HNWI portfolios.
‘What’s driving that is an increasing talent pool. The future is quite bright for Asia hedge funds,’ he told Citywire Asia.
Fees continue to be a concern in Asia but several hedge funds are rejigging their structures to attract investors, bringing down management fees in return for assets under management.
‘The fee model can vary. The 1-10 is more like the norm even though one is gone almost as an upside. Zero and 10 with a hurdle is what sometimes we can work with,’ said Yash Mishra, head of private client services at Taurus Wealth Advisors. ‘The standard business model with family offices is being challenged because we have access to larger pools of capital and patient capital.’