Asia’s record level of bond issuance is luring the region’s start-up hedge funds into fixed income, altering a long-standing focus on equities and signaling that Asia’s nascent hedge-fund industry is slowly maturing.
Hedge funds in the region have traditionally been largely what are known as equity long/short funds, which bet that some stocks will fall and others will rise. In Europe and the US, where the industry is more mature, funds use a more diverse mix of strategies. So-called macro funds, for example, bet on large economic events, and multistrategy funds employ a combination of investment methods.
“Historically Asia has certainly been a more equity-focused region, but the relative importance of equities has diminished a little,” said David Murphy, head of prime finance for the Asia-Pacific region atCitigroupInc. prime finance is the business of lending to hedge funds and helping them to raise money.
The shift comes as a result of investors’ need to diversify their holdings and because primary issuance of debt has been robust relative to equity issuance, Murphy said. Equity-market volumes are down by about 30 percent in the region.
Ben Williams, Asia-Pacific head of financing sales at Bank of AmericaMerrill Lynch, said there has been an uptick in both the number of credit-focused funds and the amount of assets allocated to such funds in Asia this year. Five or six pure credit funds were launched in Asia this year, out of a total of 67 new funds.
Williams said that while equity long/short funds still dominate the mix, the share of money allocated to credit funds has risen from “insignificant levels” in previous years. Several sizable hedge funds focused on bonds have been launched this year, showing the level of interest in fixed income, he added.
One credit-focused fund is Asia Research & Capital ManagementLtd, run by former staff members of Perry CapitalLLC’s Asia operations. The fund, which opened this year and is now one of the region’s biggest hedge funds, raised more than $900 million from investors, according to a person familiar with the matter.
According to EurekaHedge, Asian fixed-income hedge funds have returned 7.8 percent year to date, compared with 3.4 percent for equity long/short funds. The share of assets under management in Asian hedge funds in equity long/short funds has also fallen to 37 percent this year from 60 percent in 2006, and the share of money in fixed-income funds has grown from 3.2 percent to 6.6 percent.
Still, though primary issuance of debt has been robust, the secondary market for bonds in Asia is still relatively illiquid, putting “natural constraints on just how large these funds can be, and how many funds can be launched,” said Murphy.
One reason for the lack of liquidity is that the range of investors is less diverse than in the West, where participants range from asset managers who buy and hold debt securities, to hedge funds and other market makers who actively trade credit products.
A lack of liquidity deters hedge funds from trading too frequently, or in amounts that are too large, to avoid moving markets.
Another issue is that both in Asia and the West, banks, who act as dealers in the market, are less active than they used to be as they become more mindful of limits on their balance sheets and risk management. Banks act as market-makers to maintain liquidity for clients by buying and selling securities.
Dealers “encourage people to make markets for clients, but they themselves are no great repositories of risk,” said Murphy.
For now, however, any hedge-fund investor looking to sell debt would be in the minority. Selling interest is limited, further cutting into liquidity in secondary markets.
“Everyone is buying,” said Williams.