The study, by Boston-based Cerulli Associates, revealed that in Asia ex-Japan, alternative mutual fund assets under management were US$21bn at the end of September last year, about 6.1% higher than the end of 2012.
The 6.1% growth is part of a pattern of increased allocation to the asset class over the past few years, which has seen AUM in the alternative space growth from just under US$19bn in 2009.
Cerulli Associates said these allocations have primarily been driven by institutional and, to some extent, high-net-worth investors, rather than retail investors.
According to the report, institutional interest is underpinned by a burgeoning asset base and an increasing need for portfolio diversification, potentially higher yields, stable income, and as an inflation hedge. However, despite these underlying drivers, Cerulli said the path of institutions toward alternatives will likely remain slow.
“For one, they will need time to integrate the different arms and fully build up alternative investment capabilities, to the extent that they can rival pure-play private equity or real estate management firms,” said Chin Chin Quah, a senior analyst at Cerulli Associates.
Southeast Asia
Cerulli believes that alternatives have a lot of room to develop and grow in Southeast Asia as it is still a nascent area and also laws and regulations are yet to shape up in many areas.
Investor interest in Southeast Asia towards alternatives is developing at two different paces, with large institutions already allocating more assets into alternatives and retail investors still only warming up to the asset class.
Among the latter, property and infrastructure are popular investments, while the large institutions in Southeast Asia are investing into both real estate and private equity. Meanwhile, exchange-traded funds remain a segment that is developing relatively slowly in the region, with investors not particularly keen to devote funds to locally domiciled offerings.
Thailand is witnessing a massive demand for close-ended property and infrastructure funds after the Securities Exchange Commission in March allowed mutual funds, private funds, and provident funds to invest in units of infrastructure funds.
According to Cerulli, investing in alternatives such as property and infrastructure funds should remain a major theme in the Thai mutual fund space in 2014
Major institutions in Southeast Asia such as Thailand’s Government Pension Fund had 8% of its assets invested in alternatives as of October 2013, while Malaysia’s Employees Provident Fund is reported to be investing into Europe in 2013, through a partnership with Australia’s Good-man Group.
Korea
Among all the asset classes in Korea, alternatives are drawing the most attention presently from both retail and institutional investors as they look for returns amid the prevalent low yield scenario in the fixed income space.
Preferences for alternatives vary across institutions, and include private equity, real estate, and hedge funds.
Retail investors prefer derivatives funds underpinned by equity-linked securities for robust annualized returns and lower fees compared to equity funds.
“Although alternative allocations are still small at most institutions, often accounting for less than 10% of their overall portfolios, it is notable that they are rising steadily,” Cerulli said.
It noted Korea Investment Corporation that had no investments in alternatives in 2008, had allocated nearly 11% of its assets to alternatives, including private equity, hedge funds, real estate, commodities, and special investments, by 2012.
The largest institutional investor in the country, the National Pension Fund with assets of KRW402.3trln (US$350bn) as of end-June 2013, expanded its alternatives assets exposure to 9.2% of its portfolio during January-June 2013 and aims to raise it further to 11.3% by 2014-end.
Korea Investment Corporation also aims to double its allocation to alternatives by 2017, and has announced plans to pump in between US$5bn and US$10bn over the next three years. Even the Bank of Korea, restricted by liquidity concerns, has hinted at the possibility of investing in alternatives in the future
Global funds scaling capabilities
Recognizing institutions’ growing taste for alternatives, some global fund houses traditionally focused on long-only assets are stepping up their alternatives capabilities, said Cerulli.
To cite a few examples, Franklin Templeton in June bought the remaining 80% stake in Pelagos Capital Management, which manages a commodities, managed futures, and hedge fund replication strategy, while BlackRock announced in May an agreement to purchase MGPA, a London-based private equity real estate manager.
