Pacific Alternative Asset Management Co., an $8.6 billion U.S. fund-of-hedge-funds, is seeking to raise money from pensions and sovereign wealth funds in Asia to diversify its investor base.
U.S. investors account for 85 percent of its clients, mostly institutional, with the rest spread across Asia, Europe and the Middle East, said David Walter, Singapore-based director for the Irvine, California manager known as Paamco. The company is looking at Asian managers employing relative-value strategies and those investing in high-yield stocks, he said.
Paamco, which invests in emerging hedge-fund managers around the world for clients including the California Public Employees’ Retirement System, is seeking to capitalize on growing demand in Asia for alternative investments such as hedge funds and real estate. Almost three in 10 institutional investors in the region say increasing holdings of alternative and non-correlated assets is one of their highest priorities over the next 12 months, according to a survey in September by Natixis Global Asset Management.
“Asian investors are becoming more sophisticated and open to alternative investments,” Walter said in a telephone interview yesterday. “There is now great potential to expand our relationships in the region.”
Pension funds in Japan, Australia and South Korea are among those showing interest, while in other countries in the region, demand from sovereign wealth funds and endowment-type investors are seen, Walter said.
“In both cases, as investors get more sophisticated, they are increasingly going directly into large global hedge funds,” he said. “That’s where we see interest -- is working with them in building customized portfolios of emerging managers to complement their existing holdings.”
Funds-of-funds research individual offerings to spread investors’ money across a variety of holdings. Paamco typically puts money with managers through managed accounts that are customized to administer risks, Walter said, declining to comment on the performance.
Paamco is currently invested in about 10 managers focused on the region, with the majority of them in equities, and some in credit, currencies, rates and commodities, he said. The managers are mostly based in Hong Kong and Singapore, with one each in the U.K. and the U.S., he said.
The biggest challenge for the region’s managers and those investing in Asian hedge funds is the performance, Walter said. The Eurekahedge Asian Hedge Fund Index returned about 10 percent in 2012, trailing the 13 percent gain by the MSCI World Index of developed nations.
“I feel strongly there is alpha in the region and that as markets and economies develop, these opportunities will persist and grow, but the key is identifying people who can capture them,” Walter said, referring to returns in excess of those of the benchmarks. “As we invest in emerging managers, we have to spend a lot of our time getting these guys up to speed.”
Walter argued that the break-even point for Asian hedge funds where invested managers become profitable has quadrupled to about $100 million from about $25 million since the 1990s.
“Persuading institutional investors to look to invest in markets with a less certain outcome and rule of law should command a premium, and that is what the industry needs to achieve,” Walter said.