Raghu Narain, previously head of transportation, infrastructure and gaming for Asia, will take up responsibility as co-head of GIG with Wu Gang. In addition, Lani Frew, currently co-head, infrastructure, utilities and energy for Australia has been promoted to cover the power and utilities sector for Asia.

Commenting on the appointments, John Mullins, Regional Head of Banking said: "RBS has been investing heavily in many areas of its Banking business with a number of high profile hires across countries, sectors and products. With these latest senior sector appointments, we have enhanced our investment banking capabilities even further, which demonstrates our deep commitment to providing world class banking services to our clients in Asia Pacific."

"Hua's appointment is in recognition of the outstanding contribution he has made to Nomura's equities franchise and the strong confidence that we have in his experience and leadership," said Rachid Bouzouba, joint head of global equities. "His knowledge of the China market and deeply established client relationships will see him drive our strategy to build a top tier China equities platform."

He's position is newly created as part of the firm's expansion of its equities franchise. He will be responsible for all China-related equities business activities, from both a product and client perspective, and will report to Rachid Bouzouba and Zhizhong Yang, chairman and ceo for the China region. He will also retain his current role as head of fixed income research for Asia ex-Japan.

Demand from US retail and high-net-worth investors looking to generate yield and achieve diversification is driving renewed interest in cross-market plays, according to Richard Couzens, head of structured solutions Americas at Barclays Capital in New York. "Investors seeking to avoid directional views, or that want to reduce overall volatility in their portfolios, have been relatively active buyers of hybrid or multiple asset class structured products." Barclays' issuance of multi-asset class-linked products so far this year is in line with the broader market trend, growing to around 5% of its total supply, he adds.

On the face of it, the idea that investors would be increasing participation in relatively sophisticated or complicated products at a time when transparency and simplicity are at a premium seems counter-intuitive. "There is a misconception that hybrid products are highly complex and only for the most sophisticated investors," says Couzens. "This is not the case. Simplicity is the common theme among the hybrid deals we are printing."

This confusion stems from the fact that there are two 'hybrid' structured products markets. The hybrid category spans a broad spectrum of derivatives products that range from relatively straightforward indexes and index baskets to more customised correlation trades. At the simpler end of the scale, where retail investors play, are products that typically provide exposure to two or more asset classes by writing an option on an index basket such as the equity/commodity play.

A classic is a five-year principal-protected note linked to an equally weighted underlying (16.6% weighting each) index basket that contains the S&P 500, Euro Stoxx 50, Nikkei 225, WTI crude oil, copper and gold. At maturity, the investor receives principal plus the average performance of the basket, floored at zero. Against a backdrop of historically low interest rates, stirring economic growth and rising oil prices, the structure provides a neat way to generate yield and hedge against the risk that rising inflation might erode portfolio gains in real terms. The structure offers the added advantage of spreading market risk across the three main equity centres.

While an index basket product like this delivers diversification across asset classes and geographies in a single-access product, the simplicity of the payout and the view it expresses has a high likelihood of being understood by most structured product investors, say dealers. "Retail buyers of multi-asset class index baskets are not really taking a view on correlation or volatility per se," says a multi-asset class specialist at a large US distributor. "The conversations we have around these products tend to focus on the directional nature of each index exposure rather than correlations between asset classes or volatilities within asset classes, although these variables are embedded in the structure."

The second style of product, where correlation and volatility factors are explicitly targeted to meet investment objectives and achieve attractive option economics, and a more recent innovation, are more the preserve of ultra-high-net-worth buyers, accredited single-family offices and qualified institutional buyers.

(This article originally appeared in full on sister publication Structured Products magazine's website)

De-risking may have left the market long by as many as 50,000 futures contracts, says the banker. The drawdown on the Dow Jones Index, which he says was "on a scale we have not seen since October 1987", was so traumatic that by the morning of May 7 there was no bid in the market for the Eurostoxx dividend. "You had dealers trying to hedge their dividend exposure and trying to find bids. And the pension and hedge funds we thought would have been there to sustain the market disappeared. This triggered some stop losses, and that's why we had such a very severe correction on the dividend market, with the 2011 trading as low as 91 or 92, which we think was a very, very oversold situation. We did not envisage such an extreme scenario."

"Dividends did not exactly follow the stock market, which was 5-7% down when dividends lost 12%...the stock market rebounded by 10% on the following Monday, but we only saw a recovery of 5-7% on dividends. Dividends made back two-thirds of what they lost," says the banker.

The pick-up in dividends came as pension and hedge funds re-entered the market. "Many clients think that below 100, the 2011 was cheap for dividends," he says. "Clearly it should settle at much higher levels and we saw the bids return."

The market has changed since its previous large fall, in 2008, when the only trading was by hedge funds and banks - the latter are typically long dividends from their structured products businesses. "We have 70-100 active market participants in the dividend swap market," says the banker. "We worked hand in hand with Eurex to launch dividend swap futures, for one simple reason - not only did we think the bid-offer spread would tighten, but also that this would attract far more participants."

(This article originally appeared in full on sister publication Structured Products magazine's website)

Innovative Investor - Why should Asian investors in particular be interested in ETFs?

Nick Good - During these uncertain times, investors want products that are flexible, transparent, cost effective and liquid - all of which are key benefits of ETFs. Since ETFs trade exactly like stocks, they provide investors the trading flexibility to get in and out of the market at the secondary market price they are willing to trade. Given the recent years of market volatility, investors are also looking for diversification. ETFs allow investors to invest in entire countries or sectors without the risk of picking individual stocks.

Transparency has also become increasingly important to Asian investors. With iShares ETFs, you always know exactly what you own since holdings are published as often as daily. This means investors have the clarity to help keep their investment strategies on target. Finally, ETFs are also cost-efficient due to their typically lower expense ratios as compared to other investment products.

Innovative Investor - How do ETFs generally work? How do you categorize them, risk-wise?

Nick Good - ETFs combine the advantages of both mutual funds and stocks. Like stocks, ETFs can be bought and sold on an exchange during trading hours, through any broker and on most trading platforms. ETFs can also be traded on margin and sold short. And like index funds, ETFs contain groups of securities designed to track specific indices. Since ETFs are designed to track specific indices, they're inherently diversified. With one ETF purchase, an investor can gain exposure to dozens or hundreds of securities.

Innovative Investor - But is there any reason to choose ETFs over, say, a straightforward equity strategy?

Nick Good - Many investors spend more time researching and picking individual stocks instead of deciding what type of stock or asset class to be invested in. But research has shown that about 95% of money managers' performance can be attributed to their selection of asset classes rather than their selection of individual stocks. ETFs make it easy for investors to focus on selecting which assets to be invested in rather than what individual stocks to pick. ince no single sector, style, or stock consistently outperforms its peers, having a diversified portfolio invested in ETFs tracking various asset classes can help manage risk and minimize overexposure to a single stock or market segment.

Innovative Investor - Are ETFs flexible enough to deal with asset allocation needs?

Nick Good - ETFs are extremely flexible and can be used to fit investor's diverse asset allocation needs. Depending on an investor's risk profile, time horizon and investment goals, the mix of ETFs held in the portfolio will defer greatly. An investor with a longer time-horizon might warrant a portfolio filled with riskier investments with historically higher returns such as emerging market ETFs. The farther away an investor is from retirement, the longer timeframe they have to ride out the ups and downs of the market. But as an investor's time horizon shortens, assets can be shifted to more conservative choices such as bond ETFs.

Innovative Investor - What about the dangers of ETFs, is there anything in particular investors should watch out for? What about Asian Investors in particular?

Nick Good - Not all ETFs are created in the same way. When choosing between ETFs, investors should have a clear understanding of the ETF's structure. With some ETFs, such as A-Share ETFs, there is exposure to counterparty risk. Each A-Share ETF provider has a different structure in place to manage their counterparty risk exposure. Some A-Share ETFs are subject to single-counterparty risk. Since regulation limits counterparty risk to 10%, these ETFs are 90% collateralized to achieve the 10% exposure. This translates into an extra cost which is transferred back to the end investor. iShares A-Share ETFs, on the other hand, have multiple counterparties which means the risk is diversified among many participants.

It's also important to evaluate if the ETF provider's interests are solely aligned with investors. Some ETF providers earn revenues through proprietary trading of their balance sheet. There can be conflicts of interest in these situations.

Innovative Investor - Is there any way investors should try and manage their portfolios to account for the fact that ETFs don't always step-for-step match their underlying?

Nick Good - ETFs are designed to track an index and its performance. iShares ETFs are consistently monitored to ensure that tracking targets are met. However, ETFs aren't always exact replicas of the indices they aim to track. Depending on the underlying benchmark constituents' liquidity and markets, portfolio managers may choose a sampling of the index. That is why there can be a difference between the returns of the ETF and its underlying index.

Innovative Investor - Is there any differences in the way these products should be approached by institutional and retail investors in Asia?

Nick Good - Due to its flexible nature, ETFs are well suited to institutional and individual investors. We see an increasing use of ETFs by all types of institutions - asset managers, pension plans, insurance companies, sovereign wealth funds, hedge funds, as well as retail investors.

Institutional investors use ETFs to pursue a variety of different investment objectives and strategies including core / satellite models, transition management, and portfolio completion. Institutional investors also use ETFs to access hard-to-reach asset classes or restricted markets to diversify their portfolios. Retail investors can look to ETFs to gain quick and easy diversification, gain exposure to restricted markets and implement asset allocation strategies.

Innovative Investor - What do you think of the increasing acceptance of ETFs by the retail market here?

Nick Good - Since the financial crisis, many investors are looking for product transparency, diversification and liquidity - qualities which are inherent in ETFs. The flexibility of ETFs also allows investors to diversify, manage investment risk and customize exposure without the hassle of managing individual securities.

As more and more investors are discovering the benefits of ETFs, the popularity of ETFs is likely to continue to grow. According to BlackRock's estimation, the global ETF market can grow by 20-30% in 2010.

"Risk appetite has clearly been hit by the downgrades of Greece, Portugal and Spain, and investor attention is now heavily focused on contagion risks. However, we believe there are several things to bear in mind, which keep us relatively sanguine about the outlook for European corporate bonds," says Adam Cordery, head of European and UK credit strategies at the firm.

He notes that a modest economic recovery would be enough to help corporate bonds. "Attention is centred on contagion risk at present and the possibility that the eurozone is dragged back into recession by the peripheral states. However, while the issues surrounding southern Europe have clearly been destabilising for markets, and the credit crisis has shown that nothing is too big to fail, we believe it is worth remembering that things do not tend to happen in a straight line and that the failure of one doesn't necessarily mean the failure of all. Indeed, while we face the prospect that smaller European countries like Greece and Portugal are trapped in recession for some time to come, growth expectations for Europe as a whole do not appear to have changed significantly. Consensus forecasts continue to indicate modest growth in Europe in 2010 and 2011, with the large, export-led economies like France and Germany driving the recovery in GDP."

He adds that it is his firm's belief that this "modest growth backdrop" will be more than enough to help maintain the attractiveness of corporate bonds, as companies simply need sufficient cash to service their coupons and principal. Last year - during one of the worst recessionary periods in decades - 99% of rated investment grade firms did not default on their bonds and 87% of rated high yield companies did not default on their bonds. "Therefore, against a backdrop of moderate growth in 2010 and 2011, we see few reasons why the vast majority of companies should not continue to meet their coupon payments. A double-dip recession is clearly a risk, but it is not an outcome that we expect as our base case scenario," says Cordery.

The firm also believes that corporate bonds will also be supported by their valuation relative to cash and government bonds, with the spread less than it was in March 2009. The firm believes government bonds are overvalued.

Thomas J. McMahon, ceo of SMX said, "For an international exchange like SMX, the importance of having a reputed settlement bank on board is a key emphasis. The addition of RBS to the list of our settlement banks expands the choices for our clearing members."

SMX announced earlier this month that its exchange will go live in August 2010 on its electronic trading platform. In June and July, SMX will be conducting conformance testing with independent software vendors, and industry-wide testing with member firms.

SMX is Singapore's first licensed commodity derivatives exchange, and will offer products including precious metals, base metals, energy, agriculture commodities, commodity indices, currencies and other financial instruments. SMX aims to synchronise derivatives and physical trading within the Asian time zone, and offer new derivatives products for effective risk management.

The structured funds market is relatively new in the UK, with CitiFirst launching the first Ucits III combined mutual fund wrapper for the UK independent financial adviser market this year. "In the UK, structured funds are where the structured products market is going to focus," says Gary Dale, head of intermediary sales at Investec Structured Products in London.

The main attraction of structured funds is investment protection: deposits (funds) are protected by the Financial Services Compensation Scheme, unlike investments. "With the Ucits wrapper, you get various protections and they are normally collateralised. You also remove the counterparty risk element with the fund. This allows advisers to sell the payout profile without focusing on the risks," says Dale.

The structured investment scene will be a difficult place to operate because of the focus on regulation in this area. "This is where the counterparty risk lies and the lack of transparency is obvious with some products," says Dale.

He explains that the set-up costs between structured funds and structured notes are ultimately not that different: "Funds do have slightly higher set-up costs compared with notes, where all fees and charges are taken upfront directly from the trade. A number of fixed costs are down to the establishment of the wrapper and distribution etc, but once you have set that up you are just launching new share classes. It should not be any more expensive than a structured note."

Investec has not yet finalised the platform it is going to use or what the profiles will look like. "Once the idea and the platform are ready, the funds will probably get to market in about two months," says Dale.

(This article originally appeared in sister publication, Structured Products magazine)

Innovative Investor - Can you explain what signs you have that private equity firms are looking to Asia?

Andrew Gordon - This was a very interesting time to be taking the temperature of the PE [private equity] industry, as in the aftermath of the financial crisis, both GPs [general partners - responsible for management decisions in the partnership] and LPs [limited partners - and investor in the limited partnership] are reviewing their needs and their business models, and looking to adapt to the new environment. And Asia is playing an increasing role in the industry. According to our research, nearly a third of private equity firms or general partners in the US and Europe said their future fundraising efforts would likely take them for the first time to Asia-Pacific and the Middle East. Moreover, 85% of private equity investors in Asia say their allocations to the asset class would increase or remain stable in the coming years.

While economic events of 2008-2009 tested assumptions about private equity performance as well as long-standing relations between LPs and GPs, the research shows that private equity continues to grow as an attractive asset class to Asian investors. GPs are seeing many Asian LPs as having a strong appetite for the asset class, many of them managing relatively young programs with significant target allocations to put to work. Some GPs have sought out new types of LPs, for example sovereign wealth funds and large corporations looking to gain access to new technologies through venture funds - an expansion on the traditional research and development strategy. GPs are focusing their capital raising increasingly on Asia because they see an opportunity.

Innovative Investor - The report notes though that in Asia 71% of respondents would leave their allocation unchanged and 14% increase it. Meanwhile in the US 44% in the US saying they would increase allocations. Why do you feel the Asian percentage is lower than the US?

Andrew Gordon - There are a wide variety of different types of limited partners in Asia at different stages of maturity. Some are active allocators to private equity, and have been for many years - for example, Japanese insurance companies and Australian superannuation funds. Others are newer to PE - and some are themselves very new institutions. They are developing their own asset allocation strategies and investment infrastructure. During our research for "Private Equity Faces The Future: Candid Views From The Market" we found that some of these newer Asian LPs have advantages compared to other investors.

However, whilst those Asian LPs without significant legacy portfolios are particularly enthusiastic about the PE opportunity going forward, they described their boards as needing further education and experience to become more comfortable with PE as an asset class. The likelihood that a board might view PE more negatively immediately following the economic downturn was correlated to the tenure of the asset class in the given geography. Board members at 40% of Asian LP respondents were described as having recently adopted a more cautious or negative view of PE compared with 25% in Europe and just 14% in North America.

Innovative Investor - Can you describe the reciprocal needs of foreign GPs and Asian LPs? Where do they meet?

Andrew Gordon - LPs in Asia are becoming both more global in their overall investment outlook and more sophisticated. However, while they are enthusiastic about private equity, they recognize that there remains a gap in education and experience. LPs in Asia, along with those in the rest of the world, are looking at aligning their interests with GPs, as well as improved transparency and reporting. In turn, GPs need to adapt by building a more sophisticated infrastructure to service investors throughout the economic cycle. There is a cost to this, and this is sometimes a challenge for GPs at a time when their historic LPs have less capital to allocate to new funds. So GPs increasingly want and need to geographically diversify their LP base.

Innovative Investor - Anything else you see changing about investor interests?

Andrew Gordon - Our research and our discussions with the industry show that there is a heightened focus on a better alignment of interests between LPs and their GPs. This is also a focus in the hedge fund world.

Many LPs are focusing on the purpose of management fees. They believe that they should not be a profit centre, but should aim to cover costs. They hope and expect that the performance fees will reward their GPs for generating strong returns for them, thus aligning their interests. Another aspect of fees that is receiving more attention is transaction fees, and LPs are looking for a greater share of these to be rebated to the partnership and not retained by the GP. Both LPs and GPs believe that management fees and transaction fees will be of highest priority in upcoming partnership term negotiations.

GPs are also receiving more extensive requests for information about their investments - both at the fund level as well as the portfolio companies. Most expect a fundamental change in the detail and frequency of investor reporting. This is true both before a LP commits as well as in the ongoing reporting needs. The bar has been raised on due diligence, and this manifests itself in a longer decision making process for many LPs as well as an increased administrative burden on the GPs. LPs are adopting an approach of "trust but verify", and they are also looking to GPs to use third parties, such as administrators, as part of this trend.

Innovative Investor - Do you see any potential hindrances to the growth of private equity markets in Asia?

Andrew Gordon - One of the main areas of concern is around the broad subject of regulation. Respondents in Asia - both LPs and GPs - highlighted this as a potential hindrance to the growth of the industry in Asia. They are looking at the regulations that surround PE in some parts of Asia - be it seeking approval as a foreign investor to make an investment in China, for example, through to a political and tax climate in some Asian markets that have not always favoured PE investment. They were also looking over to both North America and Europe, where the regulatory environment is evolving - and the final picture is not yet clear. This may negatively impact the development and growth of budding PE markets.

Innovative Investor - What are investors looking for in private equity now as an asset class?

Andrew Gordon - Investors are looking for GPs who can do more with less. Like all participants in the financial markets, the global financial crisis has had an impact on the PE industry, even though by some measures PE outperformed many other asset classes. Leverage is now both more scarce and more expensive. LPs are looking to GPs to be more than financial operators who use borrowings and a skill to buy low and sell high. Many LPs have seen their percentage allocation to PE rise, as other assets have fallen in value by more than their LP interests in PE funds. So they do not have the capacity to invest as much into new funds. So with that scarcity, there is increased focus on the fundamental value that GPs can add to the portfolio companies they acquire - and how they did in absolute terms during the crisis. This needs to be combined with the longer due diligence process, the need for greater transparency. So the burden on GPs is increasing, but maybe their revenues are not. This may well mean that not all GPs survive.

OGICP is a Japan-based discretionary investment manager and is managing and offering its own alternative investment strategies. Triple A Partners is a Hong Kong-based global alternative investment placement and seeding specialist.

Hideyuki Fred Omokawa, president of OGICP, said, "Our clients are facing challenges in realizing their targeted investment returns to support the pension portfolios and other funds that they manage."

Hans Tiedemann, chairman of Triple A Partners, adds, "While many hedge fund distributors have closed operations around the globe, or have specifically reduced activity levels in Japan, Triple A Partners has remained focused on the opportunities in Japan."

"Our timing in forming this alliance could not be better. It has been a long time since there has been such a range of talented managers looking for capital in Japan," says Tiedemann.

The CSI RAFI 50 is designed to outperform traditional market capitalisation-based indexing strategies. It adopts a weighting methodology that recognizes the fundamental value of stocks, and minimize the negative impact as a result of overweighting on over-valued constituents, which can be the case with capitalization-weighted indices.

Timothy Chan, chairman of Ping An of China Asset Management for Hong Kong, says, "The Fund provides investors with an innovative, cost-effective and disciplined investment tool to capture the upside potential of outperforming stocks in the China A Shares market.

As at 30 April 2010, the top 10 constituent securities of CSI RAFI 50 Index are: China Merchant Bank, Baoshan Iron & Steel, Bank of Communications, China Minsheng, China United Network Communications, Ping An Insurance Group, Shanghai Pudong Development Bank, CITIC Securities, China Petroleum and Chemical Corporation. (Sinopec), and Industrial Bank.

"At the moment, it feels very much like the beginning of 2009," says Marc Chamberlain, executive director at Morgan Stanley in London. "With bond spreads widening and volatility ticking up, certain types of income products could look attractive again."

But Chamberlain warns that getting deals done could prove difficult because of the speed and unpredictability of market movements. He says there is a possibility that the FTSE 100 could drop further - although it has recovered since its fall of last Friday - as it had climbed from previous levels. Part of the attraction is attributed to the release of good company results coming out recently.

Continued volatility will result in more autocall and reverse convertible products, he says. It might also be easier to structure income products, which proved harder to create during the period of lower volatility at the end of 2009 and the beginning of 2010, he adds.

(this article originally appeared in sister publication Structured Products magazine)

"One thing I think that is interesting is that after the crisis, the terms of the CBs...investors are starting to demand CBs with coupons, compared to before the crisis when the norm seems to be that all CBs get zero coupons. And also, we're beginning to see more and more CBs attached to the type of covenants associated with straight bonds, just like giving more protection on the credit worthiness of the CB. We feel that while people are interested in the CB as an asset class, people are also becoming more conservative and thinking about the worse case scenario," says Wilkie Lai, chief risk officer at Tribridge Investment Partners.

Panelists also note that the appetite of the investment community is driving timing and issuance. Members expressed the opinion that given liquidity in the market at the moment, money is chasing these investment opportunities. They added that if investors agree that the volatility in the equity market will be picking up for the rest of the year, it makes CB is one kind of attractive investment asset class.

Panelists were positive on the outlook for convertible bonds in Asia in general, with Pradeep Swamy, head of Asian convertibles at Barclays Capital, saying "the Barclays view for the asset class is that it will actually outperform equities and credit for the year 2010." Panelists also expected "pretty good" issuance because of the financing needs of Asian corporates, though note it is dependent on the markets holding up.

Delegates on the floor questioned whether or not the rally in convertible bonds last year had left the space too crowded. Swamy responded by saying the market is "a little bit crowded but I don't think that the value has been squeezed out yet. If you look one very basic indicator of valuation, if you look at average yield to maturity or yield to put of the CB, before the crisis it was actually negative...today it is actually about 3%, positive. That's a six percentage point swing in carry. People are looking for more yield and that exists in the CB universe."

One long term trend in the asset class has been the relative shrinking of the Japanese market, against the backdrop of continued growth in the rest of Asia, with Asia leapfrogging Japan. "Fifteen to twenty years ago the Japanese CB market was 75% of the global CB market. Today Japan is 8 or 10% of the global market and Asia ex-Japan is 10 or 12%, so Japan has slipped down...Maybe [in future] Japan stabilizes, but the rest of Asia needs to grow from here on, so you'll see a bigger Asia ex-Japan CB market," said George Long, ceo of LIM Advisors.

"Another interesting things that we saw, that affected the market in Asia was basically the buyback syndrome or buyback phenomenon, both in the Asian straight bond market and the Asian CB market in 2008, which didn't really exist in Europe and the States. In Asia many companies are family owned or have one major shareholder, and either the company or the family stepped in and bought their bonds in late '08, early '09 and that provided the floor. That's quite a different market structure to what I think that exists in Europe and the US - everyone has to pay attention to the family-controlled corporate buy back," says Long.

Innovative Investor - Lombard Odier favours non-directional, relative value, investment opportunities? Can you tell us what these are and why you prefer them? Could you give some examples of suitable investments?

Philip Jehle - As market valuation rises, the implied return falls, and as the risk premium at any point in the valuation cycle falls, then the probability of a large shortfall or permanent impairment of capital rises, and vice versa if market valuation falls, implied returns rise and so on. The implication of the cycle is that we should take relative value, non-directional risk at the peak of the valuation cycle or trough of the risk premium cycle, when the return to directional risk is exceeded materially by the potential shortfall.

When we look at the current level of valuation and at the margin of safety implicit in the equity risk premium, we conclude that the current environment is a risky environment for equities, as the prospective returns to a view on the direction of the market are unattractive. Our analysis therefore suggests that non-directional strategies should be favoured over directional bets.

After the strong equity rebound experienced so far, market dislocations have receded to the point where stocks are not cheap anymore and where earnings per share growth expectations are high. As a consequence, stock picking will be back in focus of investors.

In a sub-par environment for equity returns, the ability to discriminate between good and bad stocks by investing long and short enhances the scope for generating returns. Hence, we increased our exposure to hedge funds with low leverage, high alpha and low beta strategies.

Innovative Investor - What phases do you feel economies need to pass through on the way to recovery?

Philip Jehle - Whenever a crisis occurs, the economy has to go through four phases - Liquidity, Solvency, Deleveraging and Recovery. We already went through the first two phases, and we have just entered the deleveraging phase. Historically, deleveraging begins two years after a crisis occurs, and the process usually takes seven years.

Governments, particularly those in the developed world, need to start deleveraging. Governments need to pass the overdraft from businesses to households and then the government. The total US credit market debt has reached unsustainable levels, 360% of gross domestic product (GDP). However, a credit crisis cannot be solved with more debt, but rather through substantial de-leveraging. To speed up the de-leveraging process, governments will have to foster debt restructuring, firstly debt-to-equity swaps of bank debt and secondly mortgage principal reductions for struggling homeowners.

After that we will begin to enter the recovery phase, though history shows the US economy cannot recover vigorously without an increase in private leverage. A strong revival in borrowing seems unlikely given the excessive level of private sector debt and prospects for further bank losses, and therefore expectations of a strong recovery look overdone.

Innovative Investor - Could you give details of economic headwinds you expect to see in Asia? What are the dangers and how will they come about?

Philip Jehle - Among Asian countries, we think China will be the one experiencing major headwinds. It provided a net monetary and fiscal stimulus contribution amounting to USD 1.3 trillion in 2009, equivalent of 2.5% of world GDP. However, the money went straight into the stock and real estate markets, which created asset bubbles in these two asset classes. China will be much more restrictive over the next two years to prevent overheating.

We have already seen slow down in credit expansion, the two major indices in China - Shanghai and Shenzhen - are down 19% and 16%, respectively, year-to-date. Given this situation, the current valuation in China is very expensive. Investors should wait for the market to come down before investing again.

Innovative Investor - Can you explain why you favour alpha over beta strategies at the moment? How does this tie in with the valuation cycle and risk premium?

Philip Jehle - We are currently at the beginning of the [seven year] deleveraging process. However, what is interesting at this point is that investors are complacent with the current environment. This is very dangerous, and will certainly have strong impact on the stock markets.

Therefore, we favour non-directional investment opportunities, or alpha generation, because of anticipated market shocks down the road. We need to find good investments that are not correlated to the stock market. We increased our positions in hedge funds because they offer very good opportunities in this area.

Innovative Investor - Could you tell about some of your sector and country preferences, and explain why you prefer these?

Philip Jehle - In terms of countries, we like Japan, Germany, Russia and the United Kingdom, purely from a valuation perspective. In Germany, we believe the weak euro will benefit exporters, and in the UK, we think a new coalition government will have a positive impact on the country's economy.

In terms of sector, we like select Information Technology, Healthcare and Consumer Staples names, on the basis of increased consumption of such goods and services as economies around the world recovers.

Innovative Investor - Could you perhaps give us a run through of some of the other asset classes, such as credit, currencies and commodities? Out of these where do you think the best opportunities and most interesting activity lay?

Philip Jehle - We favour cash, credit and corporate bonds on a selective basis, Asian convertible bonds, physical gold, the US Dollar and the Norwegian krona.

Corporate credit is fairly valued at the moment. Spreads have normalized, risk-reward profile is still relatively attractive, but equity-like like returns are over. The key risk comes from rising sovereign risks that affect industries that benefit the most from government support.

It is also quite interesting to see, that for the first time in history, that corporate bond yields are lower than government bonds. This shows that investors do question the governments' ability to repay their debt and therefore we are negative on government bonds.

We like Asian convertible bonds primarily because we like Asian currencies. We think it will gradually appreciate against other major currencies, and countries in this region are not overly indebted. Also, Asians contribute to 44% of world consumption, and it is just natural they will consume more over time.

Physical gold is always a good hedge against market shocks, particularly at the beginning stage of the deleveraging process of the economy, as explained earlier. Also, many investors are buying up physical gold as currency.

We are positive on the US Dollar primarily because the deleveraging effect generally has a positive impact on the reserve currency. We are invested in the Norwegian krona because the country has no debt, sits on an oil reserve, and has the largest sovereign wealth fund - all very positive factors for the country's economy.

We underweight equities in general, because again, we are in the deleveraging process, which means a deflationary environment. This is always not good for equities. We also underweight emerging markets purely on a valuation perspective. They are too expensive at the moment.