Don't panic on hedge funds in Asian debt

The hiccups in global credit markets notwithstanding, private debt in Asia is the beneficiary of healthy demand.

Bradley Ziff, a director at New York-based consulting firm Oliver Wyman, and his team spent the last few months interviewing 60 of the largest Asia-focused hedge funds that invest in the region's credit markets.

What he came across, he says, is a "boomlet.''

Four out of five fund managers in Ziff's study said they invested in privately placed high-yield debt in the region; almost 40 per cent said so-called special situations "" another name for debt that isn't sold in public markets "" are "very important'' to their business in Asia.

Asian companies like to sell debt privately because they get funds more quickly, and with fewer regulatory hassles, than they would if they were to put together a bond issue. Banks arranging the offers don't mind the fees, either.

Hedge funds like to invest in them because of the high yields. Sure, they forgo the liquidity of owning publicly traded securities. But that isn't much of a sacrifice in Asia, where corporate bond markets are small and shallow.

For the first time, companies in Asia outside Japan will raise more money through private placements of high-yield debt than public sales this year, Citigroup Inc. said in May.

Is this a new financial vulnerability in Asia? Not really. Rather than think of ways to limit the participation of global hedge funds in the private placement market, policy makers in the region ought to make efforts toward improving the state of their bond markets.

Credit Discipline
Once foreigners are able to buy local-currency bonds in the region and hedge their risks in onshore derivatives markets, a penalty for illiquidity will automatically emerge. And the systemic risks to Asian nations will ebb.

The International Monetary Fund in Washington has noticed hedge-fund involvement in high-yield, privately placed debt in emerging markets; and it isn't very happy about it.

"Many hedge funds are attracted to the high yield offered by some borrowers, as well as the lack of mark-to-market accounting on such loans,'' noted the September issue of the IMF's quarterly assessment of risks in the global financial system.

The author is a Bloomberg News columnist