Now Asia becoming AllAboutAlpha

10 Oct 2007

Hundreds of asset managers and end investors met in Hong Kong last Friday to hear the alpha-centric views of derivatives experts and economists from Deutsche Bank along with the 1X0/X0 opines of your humble scribe.  The event was the second in a two-show tour that started in Singapore on Wednesday.

Companies like Deutsche Bank (and AllAboutAlpha site partner Morgan Stanley) are the engineers who give life to the solutions advocated at  So we were very interested to hear how the alpha-centric revolution was going to actually be implemented.

Charles-John Donley (C.J.), DB’s Managing Director of the Institutional Client Group within Global Equity Derivatives here in Asia and Colin Grassie, Deutsche Bank’s CEO of Asia (ex-Japan) hosted the events in Singapore and Hong Kong respectively.  Asia is currently responsible for about 10% of traffic (60% is US and 25% is from Europe).  But if Donley and Grassie are even half-right about the burgeoning demand for more innovative portfolio construction in this market, we’ll have to translate into Mandarin pretty soon.

Donley acknowledges that Asia’s wealth creation story has been well covered by the media – and agrees that the numbers are impressive.  He says that in the top five countries in Asia, households with net assets in excess of 100,000 Euros will grow to 54 million in the next 5 years, with the number of millionaires overall, doubling to 19 million.  He adds that according to various survey from organizations such as CapGemini, that there is a total high-net worth asset pool of over US$8 trillion in Asia alone – which is forecast to increase by US$12.7 trillion in the next 5 years.

Donley says that this growth has fueled an unprecedented demand for equity-linked structured products from both private and retail banks. In emerging markets, structured products have become popular due to regulatory restrictions on capital flows.  As an example, he points to markets such as Indonesia, Malaysia and Thailand, where structured products linked to global equity markets have been one way individual investors have been able to gain global equities exposure.

According to Deutsche Bank, Hong Kong has become the world’s largest warrant market for third-party issuers, growing by 100 per cent in the first six months of 2007.  And in Singapore, volume is up nearly 120% year to date.  Apparently, India has also seen a revolution in exchange traded derivatives and is now the largest single stock futures market in the world.

Grassie told the audience in Hong Kong that a recent Asia Asset Management survey revealed assets under management in the region (excluding Australia and Japan) now exceed US$2 trillion.  He said that 2006 was the first year ever when Asia’s long term mutual fund flows exceeded those of Europe (188 billion Euros).  He added that Thailand’s 11 billion Euro in-flows in 2006 put it third behind Luxembourg and France.  And he said that by mid-year 2007, total net mutual flows were up 92% year over year, with 171 billion Euros raised in long term assets.

Donley said that pension reform, the unlocking of central bank reserves and the creation of sovereign funds (such as the ‘New China Fund’ and the ‘Korea Fund’) are set to have a substantial impact on the industry, as is QDII, the mechanism by which Chinese funds will invest offshore.

Donley said the Singapore audience on Wednesday that the Chinese regulator has already allocated QDII quotas of US$16.1 billion to 21 banks, US$2.5 billion to two fund firms and US$5.2 billion to four insurers.  Some are projecting the quota may reach US$100 billion in the next 3 years, although Donley notes that policy restrictions may mitigate this somewhat.  But whatever the final number, says Donley, it will make a substantial impact on the funds management business – particularly in Hong Kong, which will be the conduit through which investment will be made.

Deutsche Bank says that equity derivatives are also used as a financing vehicle in Asia. In these markets, private companies that are either not rated or are not ready to go public often can’t rely on traditional bank financing.  However, the bank says they are now able to access financing from global investors through new structures involving equity derivatives (e.g. pre-IPO convertible bonds).

Donley believes that we are likely to see continued strong growth in equity derivatives in Asia.  Yet despite significant growth and progress – such as the MAS in Singapore (that country’s central bank) allowing collective investment schemes to use derivatives as an investment tool – he says there remain few examples of local markets in the region with deep equity derivative liquidity.

Donley revealed one reason for this in his remarks on Wednesday.  He said that the major impediment across emerging markets remains the inability to short sell due to regulators’ concerns that it could exacerbate any downturn and have an adverse impact on domestic investors.

So despite these exciting developments in the Asian equity derivatives market, he felt that more work was required by the industry to further educate regulators about the benefits of derivatives – the reduction of gap risk and volatility and ultimately broader investor participation and the further growth of Asian capital markets.

We’re sold.  Now, anyone want to volunteer to translate all 200,000 words on into Mandarin?

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