If anecdotal evidence is true, then investor allocations to Asian hedge funds will soar in 2010. This would be great news for virtually every major stock in the region.
2010 is expected to be a very big year for Asia hedge fund allocations. According to an executive at Bank of America’s Merill Lynch unit, Asia is expected to assume as much as 20% of the total global inflows for hedge funds this year.
“Asia is still underrepresented in global hedge fund allocations,” James Fallon, director, financing sales at BofA Merrill Lynch, told the Reuters Private Equity and Hedge Funds Summit.
Asia accounts for under 10 per cent of total global hedge fund assets at present. But hedge funds in the region rose nearly 40 per cent in 2009, far outstripping the growth in their U.S. and European counterparts.
The reason this is such a big deal is that many Asian markets aren’t large enough to handle sudden inflows or outflows of liquidity as it stands. Each market may have a lot of stocks, but few stocks within each market are large enough to accommodate reasonably-sized hedge funds.
Thus if major allocation shifts are on the way, major stocks (Asian ‘large caps’) could easily go up this year regardless of local market fundamentals.
For example, when a big fund is handed millions of dollars and told to turn it into Korea exposure, it usually has to do so regardless of what it really thinks about the overall Korean market.
So we’re not saying that any particular stock should go up, we’re just saying that if these expected allocation changes become reality then most Asian large caps easily could go up for no good reason, other than new allocations to the region. Just remember not to be around when fund flows head for the exits, and make sure the above actually happens.