Investing in Asia Pacific Alternative Investments

The last few years have presented numerous opportunities for allocators to invest in Asia Pacific alternative investment managers, not only hedge funds, but private equity, venture capital, and more.  

EisnerAmper spoke with Marlon Sanchez, Founder and CEO of Skyway Pacific Research and Capital Management, a Hong Kong-based manager, on some of the opportunities to generate alpha in the region, along with the challenges it presents, and finally, how ESG is incorporated into investing.  

Key Takeaways 

• The Asia Pacific region offers significant opportunities for alternative investment alpha, particularly through hedged and arbitrage strategies that capitalize on market volatility and dispersion. 
• Successful investing in the region requires rigorous operational due diligence, emphasizing a manager's investment in human capital, strong culture, and robust infrastructure. 
• ESG integration is no longer optional but an essential component for risk mitigation, value creation, and attracting capital, with strong indicators of enhanced alpha generation for managers who prioritize it. 

Capitalizing on Volatility and Dispersion  

Investors have been able to capitalize on the volatility and dispersion on the heels of geopolitical risk, market risk, and individual portfolio risk. Hence, Sanchez said hedged strategies and hedged portfolios provide a level of defense and downside protection, and if done properly, allow investors to benefit from the dispersion that happens in more volatile circumstances. In addition, relative value, event arbitrage, risk arbitrage, and convertible arbitrage. 

While overall indices may experience underperformance during volatile periods, certain hedge fund strategies have demonstrated resilience and even outperformance. These often include long-short equity, credit, and multi-strategy arbitrage funds, which are better positioned to extract value from specific market dislocations rather than relying on broad market uptrends. 

Addressing Foundational Challenges: People, Culture, and Operations  

Despite the opportunities, some challenges come into play when investing in the region. Sanchez noted that one of the biggest obstacles he faces when investing in funds in the region is making sure each manager invests in their people and preserves their culture.  

To address this, EisnerAmper recommends conducting thorough operational due diligence. This might include analyzing:  

• Talent management: How managers attract, retain, and develop key investment and operational professionals.  
• Organizational culture: A positive and ethical culture fosters sound decision-making and reduces operational risks.  
• Internal controls and processes: Robust internal controls are essential for safeguarding assets, maintaining data accuracy, and preventing fraud.  
• Technology and Cybersecurity: Adequate technological infrastructure and strong cybersecurity measures protect proprietary data and client information.  

These operational elements directly impact a fund’s ability to execute its strategies, manage risk, and provide reliable reporting to investors. 

The Role of ESG  

ESG is paramount when it comes to investing. Sanchez said that, especially for European investors who place a heavy emphasis on it, he converses with hedge funds on their ESG policies and prefers to look at managers who factor it into their investment remit. Further, he said those managers will likely generate greater alpha.  

This stems from several factors:  

• Risk mitigation: Strong ESG practices can help identify and mitigate potential risks that could negatively impact a company’s financial performance.  
• Value creation: Companies with strong ESG profiles may experience lower cost of capital, enhanced brand reputation, and better operational efficiency.  
• Regulatory compliance: Evolving global regulations are increasingly mandating ESG disclosures and practices, making integration a necessity for compliance and market access.  

For both allocators and managers, understanding how to effectively integrate ESG factors into investment processes, from due diligence and portfolio construction to ongoing monitoring and reporting, is no longer optional.  

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