Asian hedge funds show high market correlation
Many Asian hedge fund strategies were highly correlated to the market last year, with long/short equity having the most, according to figures by data provider Eurekehedge.
The Eurekahedge Asia Long Short Equities Hedge Fund Index had a correlation of 0.88 to the MSCI Asia Pacific Index in 2011 – the highest among all strategies in the region. A figure of one indicates direct correlation to the market.
Hedge fund managers promise returns with little correlation to markets. However, some strategies are more correlated than others, particularly long/short equity, in which roughly half of the portfolio is in long stock positions.
Asian hedge fund performance last year, as a whole, had on average the same 0.88 correlation, “primarily because of the dominance of long-biased long/short equity players in the hedge fund space”, says Farhan Mumtaz, Eurekahedge senior analyst.
Arbitrage and event-driven strategies were also highly correlated, with respective figures of 0.82 and 0.85.
“Producing genuinely uncorrelated returns in Asia remains challenging,” says Frederick Ingham, Neuberger Berman’s head of hedge fund investments in Asia-Pacific. This is due to a number of factors, including the variable liquidity of portfolio holdings and the availability of hedging tools, which is relatively limited when compared with the US and European markets.
As a result, “many institutional investors seeking uncorrelated returns have historically shied away from Asian hedge funds”, says Ingham.
The least correlated strategy in Asia last year, with a figure of -0.03, was the computer-driven managed futures/commodity trading advisors (CTA) category, according to Eurekahedge data. It has displayed the least market correlation over the past seven years, says Mumtaz.
“These funds have also attracted significant capital from investors, especially after an average return in excess of 10% in 2008, says Mumtaz. He notes that Asian CTAs have total assets under management of $10 billion, compared with $4 billion in 2005.
CTAs tend to gain more attention during market downturns, when some individual funds might outperform other strategies by a wide margin. However, CTA performance varied last year, with Man Group’s AHL Diversified fund registering a -6.8% loss last year, while Monsoon Capital’s Asia-Pacific Systematic Program returned 18.16%.
Yet CTAs are far ahead of the region’s second-lowest correlated strategy, which according to Eurekahedge is Asian distressed debt. It has a figure of 0.58, followed by macro at 0.62 and relative value at 0.64.
Fixed income hedge funds, which typically take long and short positions in instruments such as bonds, convertible notes and preferred stock, would seem to offer refuge from turbulent equity markets. However, the market correlation of Asian fixed income hedge funds was relatively high last year, with a figure of 0.78.
Unless managers have greater means of hedging their portfolios, strategies will remain subject to high correlation risk, according to Ingham at Neuberger Berman.
“The trend is positive, but we still have some way to go,” says Ingham. “For really substantial investor flows, we need further openness of capital markets, liquidity, and stock borrow access to enable uncorrelated strategies to grow in Asia.”