Choppy Markets, Rule Changes Make "Liquid Alternatives" Look Good To Asia Investors - Study

Tom Burroughes

24 February 2016

So-called "liquid alternatives" - vehicles giving investors exposure to hedge fund, private equity and other assets but with more liquidity than is customary - are seen as a growth market for Asia-Pacific, new figures show.

, the Boston-headquartered analytics firm, estimates the size of UCITS-approved alternative funds in Asia to be $190 billion as of November 2015. When convertible bonds and real estate funds are excluded, that figure is $47 billion.

With some polls showing a clear desire for liquid alternatives, there are "strong signals" for growth in managed assets this year, the report says. "In Asia ex-Japan, private banks and some life insurers, such as AXA Life Insurance and HSBC Private Bank, have identified liquid alternatives as a strong growth segment," it says.

European-registered UCITS funds are often used as the structures through which Asian investors and firms place assets; these umbrella funds are tried and tested models, offering same-day liquidity, relatively wide disclosure, and oversight. The success of such a multi-jurisdictional fund market has not been lost on Asia. A number of initiatives in the region are under way to push a cross-border investment sector that could rival or even surpass that of the UCITS one. Despite some economic headwinds, Asia’s recent history of rapid growth and an expanding middle class bodes well for such an approach – but the devils of tax and regulation can often be in the details. (To see an article about Asian countries' moves to rival the UCITs model, see here.)

Liberalisation of some investment laws, and a more volatile macroeconomic climate - typically negative for traditional investments such as bonds and equities - can be positive for alternative investment areas. Such developments explain heightened interest from Asian investors, the report says.

"First, as market conditions become increasingly turbulent, individual investors are looking to alternative investments for higher returns as well as diversification. While exact sales figures are not available, the rising popularity of alternative funds, including liquid alternative funds, can be determined through the various plans by managers to either expand or introduce the products in Asian markets," it says.

"Second, regulators in parts of the region have also started to adopt a more accommodative stance toward alternative investments. This includes the lowering of capital requirements for start-ups and investment thresholds in Korea to encourage growth in the hedge fund and private equity industries, as well as an incentive scheme introduced in Taiwan for fund managers that allows them to invest more than 40 per cent of their AuM in derivatives."