Asia hedge funds continue to outperform with equity gains
Hedge funds are on track to deliver solid returns in July, according to Lyxor Asset Management’s latest briefing.
The 80-odd funds on the asset manager's $8 billion managed account platform were up 1.4% in the month to July 21, before the China market turmoil of this week. Positive returns were also seen in performance data for the week and the year leading up to July 21.
Asian hedge funds in particular have been outperformers. A pan-Asia long/short equity fund “cemented its lead” as the best performer on the platform with a 5.7% gain in the July 15-21 period.
Despite “significant losses” early in the month – and expected this week – Asia long/short equity has continued to outperform, said Lyxor’s senior cross-asset strategist Philippe Ferreira.
He observed that Asia long/short equity funds on the platform were up 30-50% in early June. “That is now divided in two” he said, explaining that a pan-Asia long/short equity fund on the platform had gained 27% in the year to July 21 while a China long/short equity fund had seen its gain decline to 10%.
Stronger pan-Asia performance highlights the benefit of being able to hedge by short selling shares. Even before the recent market turmoil, foreign hedge fund managers had been constrained from directly shorting China A-shares due to stock borrowing limitations.
Alongside long/short equity, other Asia-focused strategies have also performed strongly. An Asia-focused long/short credit fund outperformed other credit funds on Lyxor’s platform in the week to July 21, for example.
At the same time, an Asian merger arbitrage-focused fund notched up its second week in a row as the strongest-performing event-driven fund on the platform.
“It’s somewhat unusual to have such outperformance for Asian funds across strategies,” said Ferreira. “The context was a relief rally which impacted all strategies and is going into reverse this week.”
Ferreira observed that the recent rally had been unusual because it was “deep across asset classes” within Asia.
Still, the Asian long/short credit fund on the platform is highly correlated with the long/short equity funds on the platform because it is invested in high-yield credit, which is highly correlated with equity markets.
That high correlation had seen the Asian long/short credit fund underperform other credit-focused funds on the platform amid market turmoil in early July. Still, that underperformance has been less pronounced than for a long-biased long/short equity fund on the platform, which was down 15% in early July, said Ferreira. Asian long/short credit funds were down 1% and 4% at that time, he said.
Ferreira observed that two pan-Asia long/short equity funds on the platform are long-biased. “They have been able to increase their short book and reduce their long book” in July, he added, helping them to outperform the index.
Hedge funds on the platform range from $200 million to managers with $80 billion AUM. Investors prefer well-known, large funds, Ferreira said.