Asia offers hedge fund managers better opportunities to generate returns than more developed markets, but is short on the tools that would help them smooth volatility, industry players said on Wednesday.
The less efficient markets that many hedge funds thrive on will attract more managers and investment to Asia, they added, boosting the more than $100 billion hedge funds have invested in the region.
"We all recognise that there are many more market inefficiencies here in the Asia-Pacific region so that there are opportunities for smart, nimble hedge funds to extract sources of return," Vision Investment Management President Julius Wang told a fund management conference in Hong Kong.
"Having said that, the converse of the statement is that there are also limited instruments in some cases ... when the markets do have a correction or have a difficult time, how does one effectively hedge against those?"
Vision, a Hong Kong-based fund of hedge fund managers, had about $1.7 billion in assets under management as of June. Hedge funds are loosely regulated investment pools that aim to make money in both up and down markets, often by employing sophisticated trading strategies like short selling and leverage.
Short selling, a key feature of developed markets, involves borrowing shares and selling them in the hope of buying them back later at a lower price. But shorting is banned in mainland China and Malaysia, and often difficult to do in some other Asian markets.
While it is technically legal to short stock in Thailand, it had often proved too expensive, said David Roes, chief executive officer of Asean Investment Management. "We quite often find ourselves in the long-only category," he said.
Roes said Asean Investment, which has less than $5 million under management, often pursues a "friendly" activist strategy, encouraging smaller undervalued firms to improve their governance and corporate communications.
Many Asian governments clamped down on short selling after the Asian crisis of 1997-98. But attitudes have begun to soften in recent years, said former hedge fund manager Eliza Lau, chief executive of SAIL Advisors Ltd, a fund of hedge funds firm.
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