Go East Young Man: Asian Hedge Funds Steal the Spotlight

Not to be outdone by their U.S. and European counterparts, Asia-focused hedge funds are having a bit of resurgence this year, with over $3 US billion of new capital being allocated in the second quarter, according to HFR.


15 August 2013

Not to be outdone by their U.S. and European counterparts, Asia-focused hedge funds are having a bit of resurgence this year, with over $3 US billion of new capital being allocated in the second quarter, according to HFR. While still relatively a small part of the overall hedge fund pie, assets under management (AUM) have risen steadily since the financial meltdown, with industry assets of just over $98 US billion, within striking distance of the high watermark of $111 US billion set in 2007. There are a number of factors in play here driving allocations:

 

  • The outperformance of the Japanese stock market has attracted much attention as the Bank of Japan (BOJ) embarked on their own version of quantitative easing (QE) earlier this year, boosting equity returns (the Nikkei is up over 30% YTD). However, an increase in volatility has accompanied the market’s rise, potentially making investors nervous. Equity long/short managers (of which most of the capital has gone to) provide a risk-adjusted return profile that investors may feel more comfortable with in light of said volatility.
  • The Chinese market is not the golden darling it once was (the Shanghai index is down – 4.3% YTD). Being long beta in China is no longer a safe bet with trading and investment skill, now more than ever, required to navigate those markets.

YTD* Nikkei 225 34.6% Shanghai Composite -4.3% * as of 8/13/2013   HFRX Japan Index 18.7% HFRX China Index 6.4% * as of 7/31/2013

  • Like other investors around the world searching for yield, conservative Asian pension funds and insurance companies that hold the majority of their assets in fixed income may have started to re-allocate to other low-vol/hedged strategies for better risk-adjusted performance.
  • As investors continue to look for sources of uncorrelated returns, they are beginning to realize that there is a lack of alpha-generating opportunities in the western markets with too much capital chasing too few ideas. Asian markets can provide unique investment ideas within fairly liquid markets.

After many years of steady but non-spectacular growth, the Asian hedge fund market may finally have found its place in the spotlight, driven by economic, political and market forces that present compelling opportunities for institutional investors. Like their western counterparts, Asian hedge fund managers will need to recognize the importance of establishing an institutional-quality infrastructure to attract institutional-quality assets.