Private Banks and Hedge Funds Drive Growth in Asian Fixed Income
( Greenwich Associates )
(December 5, 2006)
Tuesday, December 5, 2006 Greenwich, CT USA - As their assets under management surge, private banks are joining hedge funds as one of the most important drivers of trading volume in Asian fixed income markets.
Amid rapid economic growth in Asia, increases in personal wealth have at times outpaced the development of the investment industry. Because many Asian countries lack the broad range of mutual funds, unit trusts and other investment options found in other markets, private banks have become a main repository for the growing fortunes of Asia's new high-net-worth set. Private banks and the private banking arms of global financial services companies are opening or expanding branch offices in Hong Kong and Singapore. At the same time Greenwich Associates' research into capital markets around the world reveals that hedge funds from North America and Europe are moving en masse into Asia in search of new trading opportunities and new sources of assets.
The growing presence of these investors is having a profound impact on the Asian fixed income market. As Greenwich Associates consultant Tim Sangston explains: "Every year, Greenwich Associates identifies a representative sample of the fixed income investor base in Asia. In 2005, that research universe included 40 private banks and hedge funds. By 2006, that number had increased to nearly 150."
These comments are based on the results of Greenwich Associates' 2006 Asian Fixed Income Investors Study. A new Greenwich Report presents the results of the research, including an analysis of trading volume growth in a variety of cash bond and derivatives products, and a detailed look at the increasing competition and rising salaries for fixed income professionals in Asian markets.
Growth Slows in Cash Bonds; Derivatives Boom
While a majority of the most active fixed-income traders in Asia are domestic institutions, many of the institutions driving the growth of Asian fixed income hail from Europe and the United States. Among a growing host of hedge funds in Asian fixed income are giants such as Citadel and Soros, along with smaller players from New York and London and internal hedge funds organized by some of the major global banks. Among the increasingly influential contingent of private banks are global organizations such as UBS, CIBC, Credit Suisse, and Citigroup, along with HSBC and Standard Chartered, which are more local in origin.
The influx of hedge funds and the surge in private banks' investable assets are hastening the development and maturation of the Asian fixed income market. In particular, these investors - especially hedge funds - are driving growth in derivatives and other sophisticated products. Following consecutive years of 30% growth in 2003 and 2004, fixed income trading volume across the Asian market increased 5% from 2005 to 2006. However, while overall trading activity was cooled to some extent by the relative lack of movement in longer term interest rates and anticipated inflation, trading volume in derivatives soared.
Greenwich Associates' research shows that trading volume in interest-rate derivatives rose sharply for the second year in a row in Asia - nearly tripling from 2005 to this year. In credit derivatives trading volume nearly doubled.
Hedge funds account for a substantial share of derivatives trading volume. Hedge funds generated about $5 billion in "flow" credit derivatives trading volume over the past 12 months, but the impact of the hedge fund boom is seen more clearly in some of the more sophisticated products. In structured credit derivatives, which represent a relatively new asset class for Asian investors, hedge funds account for $4 billion in annual trading volume out of a total of $14 billion, or nearly 30% of the total.
Fierce Competition for Fixed-Income Talent
The rise of Asian private banks and the arrival of hedge funds are having another important effect on Asian financial markets: they are increasing the demand and compensation for credit analysts and other fixed income investment professionals. In nearly every Asian country, average cash compensation received by buy-side fixed income professionals in Asia and reported to Greenwich Associates has risen nearly threefold compared with figures reported the prior year.
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