SINGAPORE: Increasing volatility in traditional asset classes has given rise to a new range of hedge fund-type products in Asia marketed at individual investors, from short-selling funds to football-backed securities.
In particular, an unusually high correlation between stock and bond prices has driven investors to so-called liquid alternative funds, which employ hedge fund strategies but are more easily available to high net worth and retail investors.
Assets under management of liquid alternative funds in Asia jumped 25% to US$47 billion in the first 11 months of 2015, according to analytics firm Cerulli Associates. That compared with a 5% increase in 2014 and an almost 10% decline in 2013.
"In the current market, traditional asset allocation has become a zero-sum game," said Madeline Ho, Asia-Pacific head of wholesale fund distribution at Natixis, which offers liquid alternative funds in both Hong Kong and Singapore, and plans to add more this year.
The 60-day rolling correlation between the FTSE World index and benchmark 10-year Treasury bond, for example, has been climbing since late December, and has reached its highest level since August, according to risk-management firm Axioma.
New hedging products, such as Franklin Templeton's K2 Alternative Strategies fund and Natixis's H2O Allegro fund, employ strategies such as shorting, or selling borrowed securities with a view to buying them back when prices fall; relative value, or seeking to profit from price differences between securities; and global macro, or taking positions based on economic and political expectations.
Other products, such as Singapore-based Swiss Asia's Football Finance Note, which listed in Frankfurt in January, invest in non-traditional asset classes. Investors in the note purchase future revenues from the television broadcasting rights of English Premier League games at a discount.
HEDGE FUNDS FOR THE MASSES
Unlike traditional hedge funds, most liquid alternatives are subject to mutual fund regulations so investors can enter and exit quickly. They are increasingly open to ordinary investors thanks to falling minimum investment requirements.
Franklin Templeton's K2 fund in January won regulatory approval to reduce minimum investments in the fund to US$1,000 from US$100,000 in Singapore. This fund had a negative total return of 8.5% in the year through January after sales charges versus the MSCI World index's negative return of 6%.
Even for products aimed at sophisticated investors, the minimum investment is often lower than the more than US$1 million hedge funds typically require.
Swiss Asia's Football Finance Note, for instance, requires only US$250,000.
A 2015 survey by Natixis found 80% of individual investors in Hong Kong and Singapore said they would consider alternative investments.
Liquid alternatives can be added to a portfolio of stocks and bonds to reduce volatility, said Ernest Low, head of investment and wealth management at AXA Life Insurance in Singapore, which began offering Natixis' H2O Allegro fund in the city-state in May.
H2O Allegro, which invests in bonds and currencies using long- and short-trading and global macro strategies, has outperformed its benchmark over the past year but has underperformed more recently.
AXA plans to add more funds this year, employing strategies such as long and short equity trading, Low said. But while the liquidity of such funds makes them safer than many hedge funds, the strategies they use carry new sources of risk.
These funds' daily liquidity requirements also mean that their investment scopes are more limited than those of traditional hedge funds, which could curb their ability to reduce volatility, said Wing Chan, director of fund research at Morningstar.
"Having something that's less correlated with traditional asset classes can improve the risk-adjusted returns of the overall portfolio," Chan said. "But finding something that's genuinely uncorrelated in this environment, that's probably the biggest risk." - Reuters
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