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Credit Markets in China and India Are Focus For Asian Hedge Funds
RiskCenter.com (November 8, 2007)
Location: New York
Author: Alex Paidas
November 8, 2007
The rapid growth of hedge funds in emerging Asia was
underscored by their increased activity in the highly volatile and opportunistic
credit markets of China and India, according to a study releasedÿyesterday by
the financial services industry consultancy Oliver Wyman. Nearly 80 percentÿof
the largest Asia-focused hedge funds are investing in China and India's credit
markets, reflecting the growing importance of the Asia Pacific region to the
$2.5 trillion hedge fund industry worldwide.
The study, which gauged the market and product
preferences of Asia-focused hedge funds active in credit markets, revealed that
trading in certain products is limited by low liquidity, but that fund managers
expect a steady maturation of the credit market throughout the region. The
investment preferences of 60 of the largest Asia-focused hedge funds were
examined for the study.
The study also shows that, in addition to trading a
range of credit products, Asia-focused hedge funds are investing heavily in
special situations and private placement deals, indicating growing confidence in
the financial prospects of an array of the region's emerging corporations.
"A favorable environment for hedge funds continues
to develop in Asia," said Bradley Ziff, director of the hedge funds advisory
practice at Oliver Wyman. "Not only are there more than 600 funds domiciled in
Asia, but hedge funds have become an important part of the capital equation that
is central to the growth of Asian economies."
Five of the top 10 most-attractive Asian markets
for credit-focused hedge funds are developing countries. After China and India,
the most attractive emerging credit markets for hedge funds are Philippines,
Thailand and Indonesia. The growth prospects for infrastructure, utilities, and
commodities companies are fueling hedge fund trading of credit products in these
Credit Market Activity for Asia's Hedge
||10. Hong Kong
"What's novel is that, despite the region's heavy
reliance on developing economies, a growing amount of capital is focused on
credit markets in Asia," said Bradley Ziff of Oliver Wyman. "Hedge funds and
dealers recognize that, in the coming years, credit products in emerging Asia
will present some of the most profitable opportunities for trading and managing
Seventy-five percent of the hedge funds studied
consider special situation deals in Asia "important" to their business. Of
those, about half consider special situations "very important."
Seventy-nine percentÿof the hedge funds studied are
active in privately-placed high-yield debt deals in Asia. Acknowledging limited
liquidity for these investments, funds prefer to limit tenure to between two and
According to the study, Indonesia, with its wealth
of natural resources, is among the most important countries for hedge funds
seeking special situations and private placements.
"The significant activity in private deals in Asia
illustrates hedge funds' willingness to invest directly in promising, asset- and
resource-intensive companies that are central to the development trends of the
region," noted Ziff, author of the study at Oliver Wyman.
According to the study, corporate bonds are the
most actively traded product (86 percentÿof funds).ÿSeventy-seven percentÿof
funds are active in trading credit default swaps, 46 percentÿare trading
convertible bonds and 32 percentÿare trading bank loans.
As a group, the hedge funds studied invest equally
in high-yield and investment grade credit products. 45 percentÿof the funds have
a preference for high-yield and 41 percentÿfocus on investment grade.
Thirty-six percentÿof funds say they trade local
indices and that number is expected to rise as the indices become more
representative of local economic trends.
Fund managers cited limited liquidity as a
constraint to business, particularly in single-name credit default swaps, in
certain regions. However, managers predict credit spreads in Asia will continue
to widen, creating an increase in trading volume as volatility rises.
Already, about a quarter of funds in Asia invest in
structured credit products. Several participants expected their investment in
structured credit to increase significantly.
"The interest in a spectrum of credit products by
Asia's hedge funds is leading the region's credit markets to develop in a unique
way. Current levels of support for the issue of new debt and loans in Asia
indicates to us that there soon will be enough underlying collateral in
circulation for the formation of structured credit products, " observed Ziff.
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