Long-only U.S. equities, traditionally a major staple in Asian private client portfolios, are being punished by growing concerns over U.S.-China trade risks, with the broader allocation actively being replaced by alternatives, Citi Private Bank told finews.asia.
«Hedge fund demand in Asia has come back in a pretty big way with interest particularly focused on tech-related portfolios and U.S. equities,» said Ken Peng, head of Asia investment strategy at Citi Private Bank. «In fact, U.S. long/short strategies are increasingly replacing broad U.S. long-only exposure,» Peng added.
Poor past experience and disappointing recent returns have challenged the recovery of hedge fund demand, especially in Asia where the asset class is more often associated with high octane returns rather than risk management. Even in terms of trading, investors have been traditionally unwilling to pay a premium for option hedging.
Hedging Trend
But in the case of U.S. equities, jitters from economic implications of the tensions have led to the switch. The bearish sentiment has been especially pronounced in the trading activities among Asian investors. In the second quarter, for example, structured notes with a bearish view on the S&P 500 were particularly popular.
Despite the move, Peng notes that a drop in U.S. risk appetite is not dramatic with the trading of blue-chip names, especially in the tech sector, to remain.
Breakthrough Unlikely
«We haven’t reached the stage where clients are betting on a sharp bear and investing into macro CTA strategies,» he added. «There is demand at the margin but it is not significant.»
Asian hedge fund demand since the crisis has dwindled commonly due to poor past experience, perceived lower returns and persistent success in long-only investing. A U.S.-China trade truce during the recent G20 meetings reignited markets but major headlines are already calling a breakthrough unlikely.
