Hedge funds in Asia are faced with greater diversification and trading opportunities in a less crowded market environment than Europe and the US, according to SYZ Wealth Management's alternative investment specialist duo.
Head of the manager research and alternative investments team, Cédric Vuignier, and fund manager Achraf Goneid, have revealed the main hedge fund market lessons they learnt from a recent trip to Asia.
Commenting on the growing prospects, they said: ‘As hedge funds struggle to find idiosyncratic returns in the West, we find the opportunity set in Asia extremely rich as macro, credit long/short and arbitrage managers are starting to provide greater diversification opportunities for investors.’
A new set of opportunities
Historically, managers in the area have been known for being long-biased and only able to capture the beta of the market, but today hedge funds are increasingly disintermediating local investment banks in capital markets.
In their outlook, the two managers highlight their convictions. ‘Essentially these managers take risks that investment banks do not want to keep on their balance sheets for regulatory reasons.’
In turn, this means these hedge fund managers have access to an entire range of trading opportunities, completely uncorrelated to global market moves, the two SYZ managers explained.
This can be seen as Asian markets typically display a low skew and faster volatility shifts as markets move, they said.
‘This means savvy hedge fund managers can take advantage of buying cheap options from investment banks with much more upside than in other markets.
‘There are also arbitrage opportunities in the interest rate curves of countries with onshore/offshore markets, such as Korea, where managers exploit inefficiencies in the non-deliverable forward curve, particularly as the big exporters repatriate capital at certain key points in the year.’
Hedge funds in Asia have the advantage of facing fewer competitors than those in the US and Europe, which translates into less crowded trades, they explained.
What’s more, they operate in markets that appear more inefficient, they said, which, coupled with fewer market participants, provides further decorrelation from other hedge funds.
‘Asian managers stayed clear of the issues that plagued US hedge funds’ returns in periods of market stress,’ they said.
‘The talent pool in Asia seems to be stronger and stronger as we see “third-generation managers” spinning out of large established hedge funds or foreign investment banks.