In seemingly every industry survey investor sentiment towards Asia hedge funds has been overwhelmingly positive.

The latest survey from Credit Suisse said the broader Asia-Pacific region and emerging markets are again most in demand, both by overall demand and by geographic preferences by region. Draft results from EY’s upcoming annual hedge fund survey also show good appetite for investor allocations to hedge funds in the region.

Yet, these data points come when the overall performance of hedge funds in the region has been in decline. The AsiaHedge Composite Index, which tracks the median performance of Asia-based hedge funds, is down 2.2% so far this year. Pan-regional funds too have suffered losses, with AsiaHedge data showing that on average Asia inc-Japan funds are down 8% this year, and Asia ex-Japan funds are down more than 6%.

A host of different factors play a part in making overseas investors look past the negative performance in Asia.

Chiefly, it is the large-scale institutional investors’ positive long-term outlook on Asia that is maintaining interest levels.

“You won’t want to pick your head up in 10 years’ time and find yourself having missed out on the opportunity,” says John McCormick, president and CEO, at Blackstone Alternative Asset Management (BAAM), which has approximately $77bn in hedge fund assets under management.

Another US investor taking a long-term approach to Asia is the Teacher Retirement System of Texas (TRS), a $150bn pension system.

“We have got a long view and want to be invested in global markets,” says Joel Hinkhouse, senior portfolio manager in the External Public Markets group at TRS.

Hinkhouse currently oversees the Trust’s $22bn investment in external public equity managers, as well as a portion of the Trust’s Hedge Fund portfolio.

“We have increased our investments in hedge funds in the Asia region. We have added two Asia-focused managers over the last year and a half specifically to get stronger exposure to different sources of excess return,” Hinkhouse says. “We have doubled our allocation from two to four managers, which means it’s gone from 5% to 10% of our hedge fund portfolio which is specifically addressing Asia opportunities.”

Increasing Asia hedge funds’ allure for some US investors is the region’s inefficiencies. According to Hinkhouse it is easier to find a manager with an “edge” in Asia than in other markets.

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“The long/short market in the US is mature and there are lots of really smart and well-researched managers all fighting for the same alpha,” he says. “In Asia where it is a less mature manager market, and the markets themselves are becoming more stabilised, there is much less competition for the same alpha ideas.”

Asia hedge fund returns have been exhibiting a lot of alpha and the beta, in terms of the structural growth story, is also very appealing to investors, says Laurianne Curtil, head of prime services sales and capital introduction for Asia at Goldman Sachs.

“China remains a central theme despite the recent market volatility, supported by the MSCI inclusion of A-shares and market access innovation,” he says.

“Investors generally are still underweight Asia in hedge fund portfolios and looking to increase for all the reasons above.”

Hedge fund consultancy Aksia, which advises the $50bn Pennsylvania Public School Employees’ Retirement Scheme and Univest, the in-house asset manager of Unilever’s pension schemes, is looking to grow its Asia team on the back of greater US investor interest.

“Everything has changed since last October; global hedge fund performance has been lacklustre and so attention has drifted to other areas. People looking for higher yield have to look at Asia because in the US volatility is like 2% or 3%, the same as fixed-income. They are now looking at managers that are different from the rest of the pack. They like Asia managers because they feel they are different from the rest of the world,” says Manabu Washio, head of Aksia Asia in Tokyo.

Portfolio diversification too is playing a part in US and European investors taking a closer look at Asia’s hedge funds. US investors overexposed to domestic hedge funds are beginning to diversify away from their core holdings, says Michelle Lim, co-head of Asia capital introduction at Deutsche Bank.

“One thing we are hearing is that while markets have been tough in Asia this year it provides a good entry point compared to six months ago when Asia markets had already had a significant run. Valuations are now much more reasonable if you look at where they have historically been,” adds Lim. “Those taking a long-term view on Asia may feel it’s a good time to look at the space and try and get to know managers.

“The challenge last year was that everyone had a good time and it was harder to show a level of differentiation between managers. When markets are performing incredibly well you then get people looking at long-only rather than hedge, but the volatility this year and the opportunities to make money on the short side has shown investors there is a place for Asia hedge funds in their portfolio,” Lim says.

Diving deeper

But for all of the attention that US and European investors are now putting on Asia hedge funds, many industry participants say that the vast majority of any new commitments will flow to only the region’s largest managers.

“You can split the market into two categories: the smaller managers who are relying on domestic capital to get off the ground. And that is because they have not reached the institutional grade to attract US or European money. These guys are relying on regional money to start and to launch,” says Elliott Shadforth, EY Asia-Pacific Wealth & Asset Management Sector Leader.

Much of this is due to the size of institutions in the US and Europe. As Aksia’s Washio explains: “If you put $100m in you are not going to be investing in a $300m manager. The big investors are finding it frustrating that they don’t have much choice in Asia, but they are still coming to the region.”

Yet, he adds that while most big investors start with the larger groups as a safer way into a riskier region, they will start to take on more risk and look at the smaller, lesser known, managers going forward.

Investors are now looking at managers that are different from the rest of the pack. They like Asia managers because they feel they are different from the rest of the world – Manabu Washio

“Overseas investors, particularly those from North America, have shown strong interest in investing early and have benefited from the alpha in the first 3-5 years of a manager’s lifecycle. Fund of funds, family offices as well as endowments and foundations also continue to look at day-1 opportunities,” says Goldman Sachs’ Curtil.

Slowing down the process of investing with smaller managers for some institutions is simply know-how. According to TRS’ Hinkhouse his pension fund is not at the level of expertise where it can isolate individual strategies in Asia.

“Our approach so far has been to engage multi-strategy managers, the larger ones, which have had a good deal of success across different strategies. That may evolve over time but that’s the level of our ability and comfort given the distance and our resources,” he says. “There is a higher hurdle to doing something that has the geographic and time disparity, it makes it harder to justify allocating to many Asia emerging managers.

“I suspect there are some really great managers who are smaller and up and coming, but we are not quite at the level of being able to do that kind of due diligence.”

In a bid to combat these barriers some funds of funds have been developing themselves as a consultant for institutional hedge fund portfolios, says Masa Yanagisawa, co-head of Asia cap intro at Deutsche Bank.

“Speaking to a west coast investor they actually use a fund of funds as a consultant and outsource some functions like ODD,” he says.

Hedge fund managers too have been responsive and EY’s Shadforth says there are many willing to work more with investors who are becoming more active and not just passive LPs. “The successful managers are considering differential fee structures, differential liquidity, and are able to build a different product or are contemplating multiple products to satisfy investor demands,” he says.

Another layer of investing complexity continues to be language and culture, especially among country-focused funds.

“For China or Japan managers language continues to be an issue. We are seeing less of that as more hedge fund start-ups come from more international hedge fund backgrounds. Yet, it was only a few years ago that the largest players in the space were homegrown asset management spin outs, and it doesn’t take much for people to feel like something is lost in translation,” says Deutsche Bank’s Lim.

Communication then becomes paramount, and according to EY’s Shadforth a dedicated investor relations resource is vital in attracting US or European capital.

“The critical thing when dealing with institutions is the expectation of information and frequency of involvement is much higher than friends and family money. That requires effort and managers that have the capacity to have a dedicated person are much more successful,” he says.

“Funds who have made the strategic long-term decision to hire in this area are much more likely to see exponential growth. It may sound simple to say that but those that have dedicated resources have had much more success in raising capital.”

In spite of the many frictions to allocating investor sentiment remains buoyant, so perhaps now is the time to ensure the pitch deck is up to date and begin to engage with investors who are looking in from afar.

Still on the radar on AsiaHedge.