Institutional demand for emerging market hedge funds in 2011 is set to
rise if corporate government practices become more robust and provide
higher levels of transparency, predicts BNY Mellon.
BNY Mellon said it expects a boom in institutional demand for emerging
market alternatives in 2011 if corporate government practices develop
in the region.
Until recently investors have been wary of emerging markets due to
volatility issues. This is particularly true of Asian markets. The
HFRI Emerging Markets: Asia ex-Japan Index posted returns of 34.14% in
2007 which then nosedived to a negative 33.48% in 2008.By contrast in the third quarter of 2010, the index gained 9.3%
through October, outpacing the 6.8% gain of the broad-based HFRI Fund
Weighted Composite Index, lending investors greater confidence to
invest in the region.
BNY Mellon said the global low interest rate environment is
stimulating demand for alternatives in emerging markets, particularly
in Asia.
"The global low interest rate environment is driving institutional
investors and pension funds to seek alternative sources of returns,
driving an increase in appetite for alternatives in emerging markets,
especially in Asia," said Andrew Gordon, head of BNY Mellon's
alternative investment services.
"Large institutions, especially those in Asia... are focusing an
increased degree of attention on hedge fund opportunities with
increasing numbers of investors making their first investments in the
alternatives space in the region and this is a trend that is expected
to continue well into 2011," he added.
These institutions include sovereign wealth funds, pension funds and
life insurance companies seeking better returns and portfolio
diversification.
Gordon believes corporate governance practices will determine which
hedge fund institutions decide to allocate to, listing the funds'
investment track record, the business and operational track records of
fund managers and the level of transparency they can provide to
investors as the key deciding factors.
"We believe we will be seeing a more robust outlook and increased
capital raising activities in those Asian hedge fund managers who have
invested or are willing to invest in institutionalising themselves...
building up the infrastructure of their business for greater
transparency, corporate governance and risk management," Gordon
commented.
As a result the amount of time and resources invested in due diligence
procedures "is likely to accelerate in 2011 as a number of
high-profile funds folded during the first half of 2010 and a
multitude of insider trading cases emerged in the latter half", he
said.
In late November 2010 the US Federal Bureau of Investigation (FBI)
raided the offices of three hedge funds - Diamondback Capital
Management, Level Global Advisors and Loch Capital Management - as
part of a wider investigation into insider trading.
Recognising institutional demand for excellent corporate governance
"will eventually and effectively differentiate winners from losers in
the marketplace, specifically for those smaller hedge funds from the
region", according to Gordon.
According to Hedge Fund Research nearly two-thirds of capital invested
in Asian-focused hedge funds goes to equity hedge strategies. In the
overall hedge fund industry, equity hedge represents less than one
third.
Hedge Fund Research data showed China is the principal location for
new funds, serving as the base for nearly 25% of all Asian hedge
funds.
BNY Mellon is a global financial services company with $24.4 trillion
in assets under custody and administration and $1.14 trillion in
assets under management.
Source: HedgeFundsReview.Com
