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Hedge fund performance blips

In theory, hedge fund investors should not panic when markets plunge. After all, the point of a hedge fund is to deliver returns whatever markets do.

Nevertheless, the recent turmoil in Asian stock markets, which has seen shares in Shanghai, for example, halved in value in six months, does seem to have unnerved some investors in Asia-focused funds.

The first three months of the year were pretty grim, according to figures from Hedge Fund Research published last week. Total Asian hedge fund assets dropped by 10 per cent to $100.3 billion  in the first quarter of 2008 compared with $111.4 billion  under management at the end of last year.

While assets were shrinking in Asia, hedge funds' capital under management rose slightly by 0.4 per cent globally to $1,875 billion in the quarter, HFR says. However, it notes that was the smallest quarterly increase since 2005.

Investors have good reason to be sceptical about Asia-focused funds. Emerging Asia hedge funds showed the worst performance out of the sectors that HFR tracks. Its index for Asia ex-Japan hedge funds fell nearly 14 per cent during the quarter.

Peter Douglas, head of , a hedge fund consultancy and adviser in Singapore that also manages funds of funds, expresses surprise at the size of the 10 per cent fall in assets under management in Asia.

He says funds specialising in India and China have suffered “some big outflows” but that should only account for 2-3 per cent of assets. In recent weeks, he says, there has been a revival of demand for Asia funds from outside the region.

HFR reported that, despite the weakness, investors continued to allocate capital to Asia, with more than $1 billion of new flows serving to partially offset the performance-based asset decline (compared with $16.5 billion globally). “The reason for these inflows is that a lot of the big hedge fund allocators are finally getting their heads around the idea of Asia as a place to invest,” Douglas says.

Big established players are getting most of that money. “There's almost nothing coming into the small guys and the newest managers,” he says, adding that macro, commodity and multi-strategy funds are in demand. “There's little coming into long-short equity funds.”

Emerging Asia hedge funds returned annual gains of nearly 22 per cent between 2002 and the end of 2007, HFR says. But many funds were long-short funds that played on rising share prices. While these funds are supposed to profit in both rising and falling markets, analysts say that in many cases they are long-biased. Cynics say they were little more than expensive tracker funds.

Losses

The equity bull market is definitely over. Markets in Japan and Hong Kong have declined by more than a fifth since they peaked last year. Australia, South Korea, Taiwan and India all show losses of between 10 and 20 per cent.

Now investors in Asian funds are looking for fresh themes. Arbitrage strategies, for example, attracted $2.7 billion in new assets during the first quarter of the year, HFR says. This is at odds with the global trend, where money is flowing into equity strategies and arbitrage funds show redemptions.

Future flows into Asian hedge funds look probable, despite the temporary setback in performance so far this year. HFR's president Kenneth Heinz notes the Asian hedge fund industry accounts for almost 14 per cent of the absolute number of hedge funds, but only about 5.3 per cent of total capital.

“As the industry grows and matures, Asian hedge fund investors are likely to benefit from the introduction of a broader range of strategies that will give them an enhanced ability to invest long and short as a vehicle for managing market volatility,” Heinz says. “Given the level of wealth creation in Asia, the long-term prospects for growth in hedge funds focusing on Asia remain strong.”

There are certainly encouraging signs of interest in hedge funds within Asia.

Japan's big institutions are moving beyond their traditionally conservative approach to try riskier alternative strategies, such as investing in real estate, to boost returns.

Japan's biggest private-sector retirement savings manager, the Pension Fund Association, started this year to invest some of its 13,000 billion yen of assets in hedge funds to diversify holdings.

The demand for hedge funds in Asia may be there, at home and abroad; it is just up to Asia's hedge fund managers to show they can keep the promise of returns under any conditions.

Total Asian hedge fund assets dropped by 10 per cent to $100.3 billion  during the first quarter of 2008 compared with $111.4 billion under management at the end of last year.

Source: Gulf News

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