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Nikkei Markets

Hedge funds regain some appeal as Asian markets tumble

Rising rates an advantage for industry

These funds have tended to perform better than equities during a period of rising interest rates.   © Reuters

SINGAPORE (Nikkei Markets) -- Asian investors are showing more interest in hedge funds as regional stock and bond markets retreat, perking up an industry that has struggled to raise new money in recent years due to lackluster performances.

Historical trends could also work in favor of such funds that pool money from the wealthy and institutions and aim to outperform the market.

According to James Cheo, senior investment strategist at Bank of Singapore, the private banking arm of Oversea-Chinese Banking Corp., returns from hedge funds could improve over the next few years as U.S. interest rates continue to rise and central banks elsewhere cut back on stimulus measures. These funds have tended to perform better than equities during a period of rising interest rates, he said.

"As the outlook becomes murkier, the key for investors is to diversify. One of the best ways is through hedge funds and alternatives," said Cheo. Besides potentially higher returns, hedge funds can also help investors reduce volatility in their portfolios, he added.

Financial markets have become a lot more volatile in recent months, which should benefit hedge fund managers who look at broad, global macroeconomic factors such as interest rate and currency trends, politics and changing trade patterns, said Hogi Hyun, founder and managing director of Singapore-based Abacus Capital, whose firm manages several funds and family offices.

Hedge funds use a wide range of investment strategies ranging from long-short equities that allow managers to bet on falling stock prices to more complex structures that involve the use of foreign exchange and commodities. In addition, some funds borrow heavily in a bid to produce super-sized returns.

As the name suggests, these funds seek to achieve positive returns regardless of whether financial markets are rising or falling, offering investors a chance to make money in a time of uncertainty.

Once regarded as the brightest star in the global fund management industry, hedge funds lost their shine in the years following the 2007-08 global financial crisis as managers failed to deliver performances to match their high fees. In 2016, investors pulled out $112 billion from these funds, according to estimates by industry tracker eVestment.

Hedge Fund Research, another fund tracker, said returns averaged 8.5% in 2017, underperforming the over-20% increase in the S&P 500 index and the roughly 35% rise in an emerging market stock index compiled by MSCI. Hedge funds have done better so far this year, gaining around 2% despite the drop in most emerging markets.

"We believe we are in the early stages of improved risk adjusted returns from hedge strategies," said Terence Bong, head of wholesale for Southeast Asia at Franklin Templeton Investments, which offers hedge fund-like liquid alternative structures in addition to mutual funds.

Last year, global investors allocated a net $28 billion to hedge funds. So far this year, inflows have totaled $11.63 billon with July alone accounting for an estimated an estimated $5.85 billion, eVestment said. Hedge funds currently manage about $3 trillion of the nearly $80 trillion in global assets under management.

Abacus Capital's Hyun sees recent moves by some family offices in Asia to set up investment desks managed by former hedge fund traders as another sign of growing interest in the industry.

Family offices are private wealth management firms that serve the ultra-rich. While many have allocated assets to external hedge fund managers in the past, poaching their traders and managing such strategies directly is a more recent development.

However, while money is flowing back into hedge funds, eVestment noted that most allocations have gone to larger managers, indicating the industry is still in consolidation.

A Bloomberg report quoting unidentified sources said last month that Goldman Sachs Group was shutting two hedge funds run by people based in Asia.

--Kevin Lim

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