Robust outlook for Asian hedge funds in 2011 driven by accelerating institutional demand

Low interest rate environment fuelling demand for alternatives in emerging markets, particularly Asia, with institutions drawn to Asia's strong growth forecasts and positive economic outlook

Corporate governance, transparency and risk management more important than ever to institutions when choosing their hedge fund manager

HONG KONG, 13 January 2011 — Andrew Gordon, head of BNY Mellon's Alternative Investment Services in Asia looks at the pressures impacting the hedge fund and private equity industry and what the drivers of growth are in 2011.

"The global low interest rate environment is driving institutional investors and pension funds to seek alternative sources of returns, driving an increase in appetite for alternatives in emerging markets, especially in Asia.

"In what could perhaps be described as a relatively tougher capital raising environment for hedge funds globally, 2010 saw the continuation of a paradigm change in the industry — where large institutions, especially those in Asia, including Japan, Australia, New Zealand and India, as well as the rest of the world are focusing an increased degree of attention on hedge fund opportunities, with increasing numbers of investors making their first investments in the alternatives space in the region — and this is a trend that is expected to continue well into 2011.

"An increasing number of large institutions including sovereign wealth funds, pension funds and life insurance companies are shifting their allocations to alternatives, as they seek better returns and portfolio diversification. The majority of those who have not done so are also actively looking around to identify the right fund managers to invest with. In addition to the funds' investment track record, what attracts these large institutions would be the business and operational track records of fund managers and the level of transparency that they can provide to their investors in terms of day-to-day reporting.

Transparency and risk management increasingly top of institutions lists

"Global investors continue to invest time and resources in the due diligence process with hedge funds in the region, looking into non-investment aspects of the managers including corporate governance, transparency and risk management. This trend is likely to accelerate in 2011 as a number of high profile funds folded during the first half of 2010 and a multitude of insider trading cases emerged in the latter half.

"Investors, especially large global institutions, are looking to gain increased insight into their fund managers, looking beyond the traditional aspects of performance data to get into the bottom of how sustainable the team, business and strategies are. Looking through 2011, we believe we will be seeing more robust outlook and increased capital raising activities in those Asian hedge fund managers who have invested or are willing to invest in institutionalising themselves, that is, building up the infrastructure of their business for greater transparency, corporate governance and risk management, and making sure these insights are accessible to investors.

"The global hedge fund industry is institutionalizing and this trend is moving from the U.S. and Europe rapidly into Asia. This is what we believe will eventually and effectively differentiate winners from losers in the marketplace, specifically for those smaller hedge funds from the region. Post financial crisis, global hedge funds are also reviewing their presences in Asia, with a number opening offices in Hong Kong and Singapore, competition intensifies more rapidly than ever.

Private equity expected to mirror hedge fund trends

"Many of the same investors are also active in private equity, and we see similar themes. We are talking to a number of large institutional allocators to private equity in many parts of Asia, and they are seeking help to standardise and manage the increased flow of information and data that they are increasingly demanding from their managers. As with hedge funds, they trust their mangers, but are looking for independent verification of the value that their managers are bringing to the portfolios they manage — whether a company that a private equity fund has purchased, or a listed security that a hedge fund manager has taken a position in."

BNY Mellon Alternative Investment Services — a leading service provider for alternative assets, including single manager hedge funds, funds of hedge funds, and private equity — has more than $350 billion of assets under administration and an extensive global presence, including locations in Bermuda, the Cayman Islands, Guernsey, Hong Kong, Ireland, Japan, Luxembourg, Poland, Singapore and the United Kingdom, as well as U.S. offices in five states. In addition to alternative asset administration, BNY Mellon offers a wide range of cash management, foreign exchange, collateral management, trust, operational outsourcing and custody services to the alternative investment industry.

BNY Mellon is a global financial services company focused on helping clients manage and service their financial assets, operating in 36 countries and serving more than 100 markets. BNY Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, providing superior asset management and wealth management, asset servicing, issuer services, clearing services and treasury services through a worldwide client-focused team. It has $24.4 trillion in assets under custody and administration and $1.14 trillion in assets under management, services $12 trillion in outstanding debt and processes global payments averaging $1.6 trillion per day. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation. Additional information is available at www.bnymellon.com.