Asian hedge funds find fastest GDP growth doesn't help returns

Equity focus doesn't pay off

Falling chart, value Falling chart, value

The world’s fastest economic growth isn’t helping Asia’s hedge funds.

The Eurekahedge Asian index tracking 395 hedge funds returned 1.6 percent this year through August, the worst performer among regions and about half the 3.2 percent gain by the global benchmark.

Funds have been hampered by a concentration on Asian equities, which have been driven more by Europe’s debt crisis and China’s slowdown than by company fundamentals such as earnings. The MSCI Asia Pacific Index has climbed 8 percent in 2012, compared with the 13 percent gain by the MSCI World Index.

“Most Asian funds have been focused on the equity space and that hasn’t done well,” said Dhawal Mehta, head of India equity investments at Reliance Asset Management (Singapore) Pte. “In the U.S. and Europe, you have more variety in terms of the kind of funds.”

Investors have withdrawn $447 million this year from Asian hedge funds, while 73 of them have closed in 2012, according to Eurekahedge Pte, a Singapore-based data provider. Seventy-seven percent of the funds in the region are equity-related, versus 46 percent globally, according to Chicago-based Hedge Fund Research Inc.

The Eurekahedge index tracking Asian funds dropped 8.3 percent in 2011, its second-worst year on record, after 2008. The Asian index has underperformed global peers since 2009, when it had a record annual return, Eurekahedge data show.

‘More Difficult’

“The key problem that most hedge funds have had over the past couple of years is that they have spent too much time trying to guess the macro direction of the markets and less time trying to find out what stocks are going to deliver earnings,” said London-based Richard Cardiff, who manages the $380 million CC Asia Absolute Return Fund.

This year has been more difficult for managers who invest in equities based on fundamentals such as earnings because quality stocks haven’t done as well as cyclical ones that are more sensitive to economic moves, Cardiff said, declining to name the stocks.

The fund, run by Coupland Cardiff Asset Management LLP in the U.K., is down 3 percent this year.

Managers also are struggling to meet investor demand for stricter regulatory and risk-management compliance. The often smaller asset base of Asian funds makes it harder to absorb the costs of such infrastructure.

‘Caught Between’

“Managers are caught between a rock and a hard place as investors want the Asian story, but with developed-market levels of risk management,” said Peter Douglas, principal of Singapore-based GFIA Pte, which advises investors seeking to allocate money to hedge funds.

Asian hedge funds managed $125.4 billion as of August, compared with $358.8 billion in Europe and $1.2 trillion in North America, according to Eurekahedge.

“Many Asian hedge funds remain equity focused and long biased, making them more exposed to equity-market volatility,” said Fred Ingham, London-based Asia head of hedge-fund investments at Neuberger Berman Group LLC’s alternative-assets division. “A lack of hedging tools relative to the West, coupled with a tendency to try to capture market upside, has meant that Asian hedge funds have struggled in difficult global and regional equity markets.”

The International Monetary Fund lowered its 2013 global growth forecast to 3.9 percent in July from 4.1 percent in April on Europe’s debt crisis and slower expansion in emerging markets. Developing Asian nations are projected to grow 7.1 percent in 2012, while China is forecast to expand 8 percent and Japan 2.4 percent, according to the IMF.

No Fundamentals

Among funds investing in equities, Senrigan Capital Group Ltd., the $620 million Asia-focused event-driven fund backed by Blackstone Group LP, lost about 16 percent through August, a person with knowledge of the information said, asking not to be identified because the information is private. Nick Taylor, Senrigan’s chief investment officer, declined to comment.

QAM Asian Equities Fund declined 19.4 percent through August as stock-market moves have been driven by macro-economic and political news related to the debt cycle rather than company fundamentals, said Frank Holle, the Kuala Lumpur-based co- founder of Quant Asset Management Pte.

High Correlation

The fund invests in undervalued stocks with the strongest positive earnings revisions and shorts MSCI index futures based on its own systematic computer models, according to Holle. In a short sale, a manager borrows stocks and sells them, betting they can be bought back later at a cheaper price.

“Volatility has come down a lot in the past years but correlation is still pretty high,” Holle said. “This basically means that individual stocks perform generally in line with the markets. This is driven by the fact that macro-economic and political news play a big role in the current markets.”

QAM started to fold the Asian equities fund with about $6 million of assets at the end of last month into its $29 million QAM Global Equities Fund Ltd., Holle said.

“With the smaller assets under management in the Asian fund, it seemed more efficient for our investors to transfer them to the global fund,” he added. The process is expected to be completed by the end of this month, he said.

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