Investors in Asia Keep It Close to Home
Predictions from economists worldwide are no secret: developing economies will drive economic growth for the foreseeable future. In fact, earlier this year, the IMF raised its expectation for GDP growth in developing nations as a whole by nearly 1 percentage point, to 6 percent for 2010. Leading these predictions are the Pan-Asian nations of China and India. Both are expected to outpace the rest of the world with predicted GDP growth of 10 percent and 7.7 percent, respectively.1
Furthermore, the Eurekahedge Asian Hedge Fund Index was up 26.19 percent in 2009 and is continuing its positive trend in 2010, up 1.75 percent year to date. Comparatively, the EurekaHedge global hedge fund index returned 19.66 percent in 2009 and has a slight edge in 2010, up 2.17 percent year to date.2 Other developed market indices have had better returns than their Asian counterpart thus far in 2010, but many investors are staying faithful to investing in Asian funds. This is due largely to the prevailing sentiment that emerging markets are the vehicle driving economic growth, and Asia is the leading force.
Although many international investors devote capital to Asian opportunities to gain regional diversity, the question is: Why would an Asian firm, which is already inherently exposed to its local economies aside from its hedge fund investments, wish to keep its regional focus so narrow when developed markets have performed very well in the past 15 months (and better than Asian funds during the first quarter)?
One possible answer may stem from the idea that it is important to stay ahead of investment trends; leading is always better than following, or in simpler terms: buy low, sell high. As greater proportions of the world’s investors look to Asian markets, those who have led the investment charge will reap the greatest rewards. Thus, Asian investors, who are looking for the next big profit centers, are increasingly focused on hedge funds investing in Asia, which look to be poised for exceptional returns.
Another possible explanation may lie in historical GDP growth in Asia compared with the averages across the G7 nations and the world as a whole. According to the International Monetary Fund, Asia has been well above the worldwide average for annual GDP growth since the turn of the century, in some years more than doubling this average. (See Figure 1).3
BHA analysts have seen sustained demand among Asian investors for funds that are focused on Asia. More specifically, of the 115 active hedge fund investors in Asia, 47 are looking for funds focused exclusively on their home continent—whether they are investing in the region as a whole, or in country-specific funds focused on China, India, or Japan. Comparatively, of these 115 active hedge fund investors, only 21 are looking for U.S.- or European-focused funds.
A family office based in Hong Kong recently specified that it is focused exclusively on investments in Asia. The firm has a strong preference for equity-focused funds. It believes that the favorable outlook for local economies will bolster Asian stock markets and provide exceptional investment opportunities. Furthermore, the firm believes that as capital continues to flow into this segment of the world, productivity will increase and GDP predictions will be upheld.
1 Reuters, “The IMF sharply raises global economic growth forecast,” January 26,2010.
2 Eurekahedge, April 20, 2010.
3 International Monetary Fund, World Economic Outlook Database, October 2009.