Asia’s record level of bond issuance is luring the region’s start-up hedge funds into fixed income, altering a focus on equities and signaling that Asia’s hedge-fund industry is slowly maturing. Hedge funds in the region have traditionally been largely what are known as equity long/short funds, which bets that some stocks will fall and the others will rise. In Europe, and the US, where the industry is more mature, funds are a more-diverse mix of strategies. So called macro funds, for example, bet on large economic events, and multi-strategy funds employ a combination of investment methods.
Historically Asia has certainly been a more equity-focused region, but the relative important of equities has diminished over time. According to EurekaHedge, Asian fixed-income hedge funds have returned 7.8% year to date, compared with 3.4% for equity long/short funds. The share of assets under management in Asian hedge funds in equity long/short funds has also fallen to 37% this year from 60% in 2006, and the share of money in fixed-income funds has grown from 3.2% to 6.6%.
Though the primary issuance of debt has been robust, the secondary market for bonds in Asia is still relatively illiquid. One reason is that the range of investors is less diverse that in the West, where participants range from asset managers who buy hand hold debt securities, to hedge funds and other market makers who actively trade credit products.
Both in Asia and the West, banks, which act as dealers in the market, are less active than they used to be as they become more mindful of limits on their balance sheets and risk management. Banks act as market makers to maintain liquidity for clients by buying and selling securities. Dealers encourage people to make markets for clients, but they themselves are no great repositories of risk.