Asian Hedge Funds Bullish On Chinese, Indian Credit Markets

Nov 7 2007 | 11:52am ET

Asian-focused hedge funds are not shy when it comes to investing in the credit markets in emerging economies. According to a study released yesterday by the financial services industry consultancy Oliver Wyman, nearly 80% of 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 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.”

Meanwhile, 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 the Philippines, Thailand and Indonesia. The growth prospects for infrastructure, utilities, and commodities companies are fueling hedge fund trading of credit products in these countries.

Other findings of the study show that 75% of the hedge funds polled consider special situation deals in Asia “important” to their business. Also, 79% of the hedge funds studied are active in privately-placed high-yield debt deals in Asia.

The study also shows that corporate bonds are the most actively traded product (86% of funds), while 77% of funds are active in trading credit default swaps, 46% are trading convertible bonds and 32% are trading bank loans.

As a group, the hedge funds studied invest equally in high-yield and investment grade credit products.

On the downside, 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.

For the study, Oliver Wyman interviewed 60 of the largest Asia-focused hedge funds through the third quarter of 2007.

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