Permal Group is seeing a pickup in mandates this year from countries such as Japan and Korea — the culmination of a long, deliberate process investors in those countries typically go through before reaching “the conviction stage,” said Roberto Giuffrida, executive vice president and co-head of global business development for Permal Group in London. He declined to name clients.
Mr. Giuffrida cited the hunt for yield by institutional investors with bond-heavy portfolios as a factor powering that momentum. Permal is Legg Mason's $25 billion hedge funds-of-funds affiliate, with Asia-based clients accounting for roughly a quarter of the total, according to Alastair Crabbe, the firm's London-based spokesman.
“The story really is low bond yields, (with investors) running out of alternatives” for what they can do with fixed-income allocations that run as high as 80% to 90% for insurance companies and pension funds in countries such as Korea or Taiwan, said Muj Ali, Hong Kong-based managing director, Asia Pacific institutional sales, with Mesirow Financial Hong Kong Ltd.
Against that backdrop, Mesirow executives are seeing more interest than they have in years from institutional investors in the region for the firm's hedge funds-of-funds offerings, said Mr. Ali. Mesirow has $13 billion in hedge funds-of-funds assets, of which just less than $4 billion comes from Asia-based investors.
Firm executives say a period of rocky performance for some large hedge funds could also be helping funds of funds get a second hearing.
It can't be described as a groundswell yet, but interest “is definitely picking up” — a consequence, perhaps, of the uneven returns a number of institutional investors with direct hedge fund programs have experienced, said Ray Nolte, co-managing partner and chief investment officer with Skybridge Capital, New York.
Increasingly, investors are coming to appreciate how taxing direct investment programs can be on their investment teams, in areas such as research, due diligence and timely updates on underlying hedge fund managers, agreed K2's Mr. Rice. A growing number are moving to have a combination of direct investing and hedge funds-of-funds programs, he added.
Those signs of life for funds-of-funds providers are prompting some firms to make a bigger commitment to the region now.
That “refocus” on funds of funds is one reason Skybridge announced its “first major institutional relationship” last month — with Seoul-based Woori Investment & Securities, to distribute Skybridge's hedge funds-of-funds services in Korea and other parts of Asia, said Mr. Nolte.
Asia-based investors account for roughly $250 million of Skybridge's $5.1 billion in discretionary hedge funds-of-funds assets. The firm has an additional $3 billion in assets under advisement for U.S.-based clients.
For the moment, the pickup in interest in hedge funds-of-funds strategies is essentially an Asian story, Mr. Rice said.
Money managers say the renewed interest among Asia-based investors in hedge funds of funds doesn't signal a return to the days when institutional investors were rushing to park hundreds of millions of dollars in commingled funds-of-funds vehicles.
Interest this year has been focused on customized solutions, said Kai Sotorp, a managing director and head of Asia Pacific for UBS Global Asset Management in Hong Kong.
The push is more for customized solutions where transparency on holdings and fees is very important, said Paul Price, London-based head of international distribution with Morgan Stanley Investment Management.
The pickup in activity began in the third quarter of 2012 with searches — including some public tenders — in the central bank market, broadening more recently to include searches for “bespoke solutions” in the corporate and pension sectors, said Mr. Price. He declined to name clients.
Richard Johnston, head of alternatives consulting firm Albourne Partners (Asia) Ltd., Hong Kong, said the move to customized solutions is gradually blurring the distinction between firms such as Albourne, which advises institutional investors looking to invest directly in hedge funds, and the hedge funds-of-funds providers.
Konosuke Kita, head of investment consulting for Russell Investments Japan, Tokyo, said many of Russell's clients now are rethinking their approach to investing in hedge funds, having been less than satisfied with recent performance.
But he said he hasn't seen a decisive move back to funds of funds. Instead, the two biggest trends appear to be moves from commingled hedge funds-of-funds strategies to customized strategies overseen by HFOF firms, and moves into direct investment programs, he said.
Still, some hedge funds-of-funds firms see a clear shift in their favor.
