Asia hedge funds post biggest loss for 19 months

Jun 8, 2010

In May, Asia hedge funds suffered their biggest drop since October 2008, according to both Eurekahedge and Hedge Fund Research. Adding to managers' woes globally have been liquidations and outflows.

Hedge funds have followed a blockbuster 2009 with a poor first five months of performance this year, with Asia managers posting particularly limp figures.

In May, Asia hedge funds fell 5.67%, according to US-based Hedge Fund Research's HFRI Asia ex-Japan index, and 3.91%, according to Singapore-based Eurekahedge's Asian Hedge Fund Index. Both companies say last month's performance is the worst for Asia managers since October 2008. However, Eurekahedge has their performance as +0.98% for the year to May 31, while HFR's figure is +3.14% for the same period.

Only Russia/Eastern Europe funds saw a bigger decline than Asia funds in May (HFR: -9.98%; Eurekahedge: -7.75%), but the former group remains positive for the year to date (HFR: +0.80%; Eurekahedge +2.08%).

The particularly irrational nature of the markets seems to have been a factor for Asia funds. Singapore-based hedge fund research firm GFIA commented in its monthly report published last week, on May 31: "May is looking comparable with July 2008, in terms of the indiscriminate sell-offs and the rate of change of risk appetite."

Hedge funds globally fared better than Asia managers, but still suffered their worst month of performance since November 2008, according to HFR, while Eurekahedge says you have to go back to October 2008 to find a worse monthly drop. The HFRI Fund Weighted Composite Index declined 2.26% in May, ending the first five months of 2010 with a gain of 1.32%, while the Eurekahedge Hedge Fund Index fell by 2.14% last month, posting a year-to-date return of 1.03%.

"Hedge funds were broadly impacted by the sharp increase in risk aversion associated directly with the sovereign bond crisis escalation," says HFR, "as well as by the effects this situation has had on global equity markets, corporate fixed income, and currency markets."

Strategy-wise, equity hedge saw the worst performance, declining 3.7% in May, as global equity markets were broadly impacted by the increase in risk aversion, according to HFR.

Event-driven strategies posted a sharp loss of 2.2% on increasing risk premiums in announced transactions and weakness in the corporate credit markets, with the weakest areas of performance in distressed and shareholder-activist strategies.

Relative-value arbitrage (RVA) fell 0.98%, as losses in convertible-arbitrage and corporate credit strategies were only partially offset by gains in volatility and asset-backed strategies, says HFR. May losses have pared 2010 gains for RVA, bringing YTD performance to +4%, and the month's negative performance also snapped a streak of 16 consecutive months of gains for RVA.

Macro posted a loss of 0.94% as gains in currency-focused funds were offset by losses in other discretionary macro strategies. Systematic diversified macro experienced a wide dispersion across constituents, with an average decline of 1% in May.

Moreover, the disappointing figures follow net hedge-fund outflows in April -- the third month of outflows this year -- and a rise in liquidations in the first quarter of 2010.

US data providers TrimTabs Investment Research and BarclayHedge yesterday reported that the hedge-fund industry posted an estimated outflow of $3.5 billion, or 0.2% of assets, in April. Yet strong performance has added $338 billion to hedge fund coffers in the past year, lifting assets to $1.65 trillion, the highest level since November 2008, according to the TrimTabs/BarclayHedge Hedge Fund Flow Report.

"Recent flow weakness is surprising," says Sol Waksman, chief executive of BarclayHedge. "Industry performance has been stellar -- hedge funds posted a positive return in 12 of the past 14 months -- and April is historically a strong month for subscriptions."

By contrast, funds of hedge funds posted an inflow in April for the first time since November, while commodity trading advisors posted a second straight monthly inflow. Event-driven funds took in $2.1 billion in April, more than any other hedge-fund strategy, while fixed-income funds saw redemptions of $2.5 billion, one of the largest outflows. Event-driven funds boast a year-to-date return of 5.8%, one of the best performances of all strategies.

Meanwhile, hedge-fund liquidations rose again in the first quarter of 2010, with 240 funds closing during the period, after falling steadily for four quarters, according to the HFR Market Microstructure Industry Report released yesterday.

There were most liquidations among funds of funds (FOFs), with 102 closing in the quarter, marking the seventh consecutive quarter in which FOF liquidations have exceeded new launches.