We all know that Asia is a dynamic region. Economic liberalisation continues to drive growth in Chin...
We all know that Asia is a dynamic region. Economic liberalisation continues to drive growth in China, and clear winners and losers are emerging in corporate Japan.
Yet, the traditional benchmark-relative approach to investing in the region minimises the importance of these factors. Allocating according to the MSCI World index, Switzerland and Asia ex Japan have comparable weightings but have widely differing population sizes, sizes of economy, and investment opportunities.
As China integrates with the global system of capitalism, investors will realise it is an investment opportunity, not an irrelevance. Even as broker coverage declines in Asia and pricing anomalies ' investment opportunities ' become more plentiful, valuations in the region remain close to trough levels. On a price/earnings basis, we are back at 1983 levels, for example.
Historically, the problem for investors in the Asian markets has been that they are volatile. For short periods, returns have been excellent, but the variation in these returns has been considerable.
It's been a real roller coaster ride for investors. The annualised rate of return over the past 15 years has been 6% but the maximum drawdown over this period ' the maximum peak to trough you might have endured as an investor over this timeframe ' has been an eye-watering 66%.
Market timing in the region has tended to be difficult. It is not just a question of missing the first bit of the rally and giving up the last bit of strength on the other side. Typically, investors attempting to market time will miss the majority of the returns available in the region.
With modern risk control techniques, the majority of long-only fund managers constrained by their guidelines deliver returns clustered around the index.
However, this doesn't help if the benchmark itself has been very weak, because the capital loss can still be considerable in the short term.
In bull markets these returns would be much stronger, but still with that high level of volatility and still clustered around the index.
Not every investor is prepared to tolerate this level of risk, even if the rewards over the long term are likely to be attractive. For those investors, an alternative approach to investing in Asia may be more appropriate, as hedge fund managers are able to offset this risk by using a wider variety of investment strategies, including shorting stocks.
Of course, finding the right single strategy hedge fund in the region can be a tricky business too.
Even when these funds are open to new investors, due diligence and performance are satisfactory and the sum involved is substantial enough to meet the minimum investment size for the fund, it can still be a volatile ride depending on the investment strategy chosen.
We believe a fund of hedge funds approach is an attractive way of reducing that volatility, bringing down the level of risk and smoothing out the pattern of investment returns.
Asia is an attractive long-term region.
Valuations are highly attractive.
Fund of hedge funds smooths out volatility.
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