With investment markets and institutional balance sheets on shaky ground in North America and Europe, hedge fund mangers are struggling to grow their assets under management in conventional markets. Institutions are looking for liquidity to meet cash obligations as well as reduce risk heading into what appears to be highly volatile market conditions. The search for increased liquidity certainly does not bode well for most hedge fund strategies, but there is one market that seems to be shrugging off the liquidity rush.
According to a recent article from Bloomberg’s Bei Hu, Investors in the Asia-Pacfic region are stepping up in a big way to fill in the gap left behind by their American peers. Blackrock indicated that over half of its new money in the most illiquid, long-term fund categories, including direct corporate lending funds, has come from clients in the economically robust region. While American and European institutions look to reduce their balance sheets, especially in alternative assets, for economic and regulatory reasons, Asia based investors are looking towards the diversification opportunities provided by hedge funds.
Hedge Funds Seek to Fill Void Left by European Banks
With the dramatically reduced loan portfolios of rapidly deleveraging continental European banks such as Societe Generale and BNP Paribas, corporations within the Eurozone are struggling to access debt capital on favorable terms. It’s important to note that Europe has a substantially different perspective on corporate finance in comparison to American financial traditions. Where American companies commonly access the debt capital markets for corporate finance needs, European companies generally rely first on bank credit. The reduction in loan origination by Europe’s biggest banks has created a substantial capital void, and hedge funds are looking to capitalize on this opportunity.
Blackrock in particular is looking to enter the direct corporate finance market, especially in capital intensive European industries. One such industry is the aviation industry, where aircraft deliveries are expected to reach $95 billion this year, a 23 percent increase year over year. This is despite declining bank finance availability, which is forcing firms to be innovative in where they source their funds. Hedge fund managers are stepping up to the plate, offering direct loans. These loans offer carry attractive yields, due to the lack of traditional bank competition.
Hedge Funds Resilient due to Creativity
Despite weak market conditions and aggressive regulators looking to extract their pound of flesh, the hedge fund managers have remained, by and large, resilient. Sure, many funds have met a tragic end over the past several years, but the industry has lived on in the face of some “creative destruction.” The creativity and diversify of strategies used by the hedge fund industry has allows managers to adapt to the rapidly changing world around them since the bottom fell out in 2008. Whether funds seek out investors in new geographies such as the Asia-Pacific region, or look for opportunity in the shrinking balance sheets and loan portfolios of European banks, managers are constantly shifting their stance as the environment changes. From an industry that created so many innovative strategies, this should be expected. No matter what regulators or markets throw at them, hedge funds will likely live on in one form or another.