SINGAPORE (Nikkei Markets) - The hedge fund industry had a brutal 2018, with many funds succumbing to both performance-based losses and investor outflows. However, its fortunes could turn in Asia where investment strategies that offer absolute returns like these funds remain popular with asset managers as well as the private banks that advise the region's wealthiest families.
Hedge funds, as the name suggests, seek to achieve positive returns regardless of whether financial markets are rising or falling, offering investors a chance to make money in times of uncertainty. But their strategies don't always work. Bloomberg estimates that six in 10 hedge funds lost money last year, the highest proportion since the global financial crisis.
According to the Investment Management Association of Singapore, in a recent survey, fund managers in the city-state identified absolute returns as their most popular strategy for this year alongside approaches based on buying into companies with high environmental, social and governance scores. Absolute returns ranked number three in last year's survey.
IMAS, which shared its findings on Wednesday, is the main fund management industry body in Singapore, one of Asia's largest financial hubs with over $2.4 trillion in assets under management. Hedge funds in the city-state had about 162 billion Singapore dollars ($119.14 billion) in assets at the end of 2017, an increase of 18% from 2016, according to the Monetary Authority of Singapore.
Data from Eurekahedge, a Singapore-based fund tracker, put the global hedge fund industry's performance-based losses and net investor outflows at $58.9 billion and $51.6 billion, respectively, for last year. This followed a healthy 2017 when industry assets grew $221.9 billion over the preceding year.
Hedge fund managers focusing on the Asia Pacific were among the worst performers as Asian stock markets and currencies fell sharply, it added.
Nevertheless, the average 3.85% loss in the value of hedge funds last year puts them ahead of the broad MSCI AC World Index, which fell 10.18%.
Given expectations of heightened market volatility in the coming months, private banks continue to recommend holding more hedge funds and similar investment structures in portfolios to achieve returns that are not correlated to equity or bonds.
"As rate policy normalizes and volatility increases, we feel diversification will become more important, particularly in portfolios that have significant fixed-income exposure. Therefore, we emphasize strategies that can deliver modest positive returns in most market conditions," said Pierre DeGagne, head of funds selection at DBS Group Holdings' private bank.
While hedge funds are known to make huge multi-billion-dollar bets, most managers attempt to minimize volatility and protect investors from huge swings in equity and bond markets.
Strategies recommended by private banks include "market neutral," which involves taking matching long and short positions in different stocks to increase the return from making a good selection while decreasing the risks from broad market movements. The "relative value" strategy involves simultaneously buying and selling different securities to take advantage of the relative difference in values.
"Given the increased macroeconomic uncertainty, relative value strategies could see more upside as they benefit from mispricing and arbitrage opportunities," Swiss private banking giant UBS said in a note to clients.
Edward Moon, regional head of alternatives at HSBC Private Banking Asia, added that the choice of managers is essential in hedge fund investing, as performance can vary sharply.
"The due diligence approach is one of the keys to maintaining a sustainable hedge fund platform: it begins and ends with a strong manager selection process," he said.
HSBC Private Banking said clients with a medium risk appetite should allocate 15% of their portfolio to hedge funds, while low-risk investors should hold an even higher 18.8%, making it one of the biggest advocates of hedge funds among private banks.