Hedge funds, private equity lure billions from rich Asians

WEALTHY Asians are pouring money at a record pace into alternative assets through private banks and high-end investment firms to escape low interest rates and volatile listed markets.

The haul at JPMorgan Chase & Co's private banking arm from Asian clients more than doubled this year to an all-time high. HSBC Holdings hit a record, with more than half of its inflows coming from Asia. Firms such as Credit Suisse Group and Apollo Global Management have made key personnel moves to step up in a region that is seeing the fastest growth in wealthy people.

"Historically, most of the private banking client demand for alternative investments has come from ultra-high-net-worth individuals (UHNWIs), who are familiar with private equity," said Alois Mueller, the co-head of private equity at Credit Suisse who relocated to Hong Kong to also lead private & alternative markets Asia-Pacific. "This trend is now being extended to high-net-worth and affluent investors as well."

While a crackdown by Beijing on private business and a campaign for common prosperity have jolted Asian markets, the region - already home to more billionaires than any other - is a fast-growing hub for private banking. It is poised for the biggest jump in individuals with a net worth of at least US$30 million, said a Knight Frank report. By 2025, the region will be home to 24 per cent of all UHNWIs, up from 17 per cent a decade earlier, it said.

At JPMorgan, the total amount raised from wealthy Asia clients is in the billions of dollars this year as demand for investing in hedge funds jumped several times and interest in private equity nearly doubled, said Albert Yang, head of alternative investments for Asia. The private bank has also set up the structure for a bespoke distressed fund for its wealthy clients.

While definitions vary, UHNWIs typically have fortunes of more than US$30 million, while high net people can sit on at least US$1 million. Private investments typically offer higher returns but are less liquid. Annual returns on alternative investments are often "in the teens or even higher", said Mueller at Credit Suisse.

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Even so, hedge funds come with their own risks. In November, they posted the largest single-month decline since March 2020 as equities fell sharply due to fears of new Omicron restrictions, showed Hedge Fund Research. As one example, the US$4 billion hedge fund at Hong Kong-based BFAM Partners is heading for the first annual loss in its 9-year history, hurt by a sell-off in China real estate credit.

The BFAM Asian Opportunities Fund lost more than 10 per cent in the first 11 months of the year, said people with knowledge of its performance. The crackdown on the real estate sector has prompted a number of companies to fall into distress, wiping US$46 billion off the wealth of China's property tycoons.

From directional to diversified

And private bankers are being careful in where they place their clients' money. The alternative asset team at JPMorgan's private bank met with more than 1,000 private investment managers and up to 500 hedge funds globally this year, picking just 3 per cent to invest in, said Yang.

Asian clients have shifted capital from "directional" hedge funds, that typically offer higher returns but are more volatile to multi-strategy, to more diversified hedge funds that can deliver returns of about 8-12 per cent, he added.

The rising need for private equity among the wealthy comes as firms are cooling on China, pulling back from real estate. Among international funds, a third will reduce their exposure to Chinese property over the next 3 years with none planning an increase, showed a survey by alternative asset manager Coller Capital. When including buyouts, venture, infrastructure, and private credit, there was an even split between increasing or cutting investments in China, Coller found.

China private market fundraising has slumped about 60 per cent year to date from 2020, showed data compiled by Preqin.

Credit Suisse has raised more than US$1.5 billion from wealth management clients for its annual vintage private equity fund over the past years, with "strong and increasing demand" from Asia-Pacific, said Mueller. Credit Suisse also partnered with BlackRock this year to launch a bespoke private equity fund that focuses on health and well-being.

HSBC, Europe's largest bank which is pushing to become the leader in wealth in Asia, earlier this year said it raised a record US$2.3 billion from wealthy investors for alternative investments globally in 2020, with Asia accounting for US$1.34 billion. Globally, alternative investment firms such as KKR & Co are increasingly focusing on the ultra-rich as a pool of untapped capital for their private equity, real estate and credit funds. Apollo this month poached Edward Moon from HSBC to be its head of Asia-Pacific for global wealth in Hong Kong.

Global wealth is a "key growth channel" and Apollo expects individuals and their advisers to invest US$50 billion in its strategies over the next 5 years and is building its business to support this demand, said Stephanie Drescher, the firm's chief client and product solutions officer. BLOOMBERG