After being among the top performers of 2007, Asia-focused hedge funds are suffering this year. In 2007, the HFR Asia composite hedge fund index returned more than 17%, and the Asia ex-Japan index almost 40%. Year to end-May 2008, however, the Asia ex-Japan index is down almost 10%. If investors piled in based on past performance, they will now be kicking themselves.
Ken Heinz, president of HFR, says poor performance in the Asian hedge fund industry is a result of several factors, of which declines in Asia’s equity markets and the strategy composition of the Asian hedge fund industry are both significant ones. The Chinese market is down about 40% year to date.
"Asia-focused hedge funds have a much higher equity strategy component than other regional-focused funds," says Heinz. "Some two-thirds of funds are equity hedge compared with globally, where just over one-third of all strategies are equity hedge. So the impact of underlying equity market declines becomes more pronounced in Asia."
Intensifying the decline in aggregate returns is the fact that only a small proportion of Asia-focused funds are running a macro strategy. Macro strategies have been the outperformers of the past nine months, with the HFRI Macro Index posting a gain of more than 12% since September 2007 and HFRX Macro Index having gained more than 12% year to date.
Heinz says: "Macro strategies, which have benefited from persistent trends across asset classes, as well as long commodity and short US dollar positions, are under-represented in the Asia hedge fund industry. The lack of exposure there, combined with the sharper declines in Asia’s equity markets than other markets provide some insights into explaining this year’s results."
Khiem Do, a portfolio manager at the Asia Pacific Fund, a long-only investment company listed on the New York Stock Exchange, agrees that 2008 has been challenging for managers in Asian strategies. "Volatility has been significant," he says. "One month markets are up, the next they are down. Furthermore, growth stocks have been smashed as leveraged funds or macro or prop funds have derisked their portfolios and sold off the growth stocks at any price. These were very good stocks that could have been held by a lot of managers on the long side. So stock selection has been incredibly difficult, and short squeezes have stopped money from being made on the short side too."