Asean linkage to boost hedge funds' interest

Jon Wongswan, vice president of equity and derivatives trading at Phatra Securities, said Asean would enjoy an outstanding growth story over the next 10 years, attracting hedge funds.

Six countries, including Thailand, will join the linkage, which is expected to come into play next year.

He said Thailand needed to prepare for entry. If not for the linkage, the Thai market would remain ignored by hedge funds for several reasons, he said.

Concerns over political problems are one, aside from the severe capital control Thailand once imposed in 2006 to restrict fund flows.

Moreover, the Thai market is small. Thailand's share of Morgan Stanley Capital Index Emerging Markets is just 1.5 per cent.

He added that the SET Index did not reflect the real conditions of the Thai economy. The agricultural sector is drawing foreign investment but there are few stocks in this sector in Thailand.

Energy stocks account for 30 per cent of total market capitalisation, though the sector generates only 7 per cent of GDP. However, the agricultural sector, which contributes 11 per cent of GDP, accounts for only 6 per cent of market capitalisation. The manufacturing sector, contributing 34 per cent of GDP, accounts for 18 per cent.

Another hindrance is the rules on securities lending and borrowing. Borrowers are compelled to deposit cash of 120 per cent of the value of borrowed shares, but in many markets borrowers can use shares to back up the borrowing.

"Not that I support the entry of hedge funds, but the market should be better off with a larger number of investors," said Jon, who while in the US managed a US$300 million hedge fund.

"Anyway, the country should prepare for the entry as hedge funds will play a significant role. Despite the global financial crisis, investment in hedge funds tends to rise due to the high returns, high-risk policy."

About 80-90 per cent of investment managed by hedge funds is from pension funds, according to Phatra Securities. Pension funds normally allocate 10-15 per cent of investment for hedge-fund management.