Asian hedge fund inflows stutter despite outperformance

May 4, 2010

The first quarter of 2010 saw net hedge fund withdrawals after two quarters of inflows, but the pace of fund closures is slowing, say industry specialists.

Following two consecutive quarters of capital inflows, Asian hedge funds saw net redemptions of around $700 million in the first quarter of 2010, according to Chicago-based Hedge Fund Research Inc (HFRI). This reflects continued concerns about strategic and regulatory risks, says the data provider.

However, the $700 million in investor withdrawals was offset by a performance-based increase of $1.5 billion, resulting in total assets invested in Asia-focused hedge funds increasing to $77.149 billion from $76.339 billion at the end of 2009. This reflected an equally modest increase in total hedge fund industry assets to $1.668 trillion from $1.600 trillion, says HFRI.

The estimated number of Asian hedge funds declined slightly during the quarter to 1,036 from 1,039, although the total hedge-fund industry saw a small rise to 6,942 from 6,883.

Still, the proportion of Asian hedge funds closing in 2009 was far fewer (12%) than in 2008 (19%), and closer to the long-run average of 9%, says Singapore-based hedge fund research firm GFIA. Moreover, 2008 saw 129 Asian hedge fund closures, a figure double that of the previous year.

As for geographic location of hedge funds, from Q1 2009 to Q1 2010 there was a significant drop in the overall proportion of Asia-focused funds based in the UK (to 19.35% from 23.73%), according to HFRI. However, the proportion based in the US grew slightly (to 26.88% from 24.52%) and that in China saw a bigger increase (to 23.12% from 20.06%).

Asian hedge funds continued to outperform equity benchmarks in the first quarter; the HFRX Japan Index gained 7.6%, while the HFRX China Index was down 0.75%. Moreover, Q1 was the first quarter since the financial crisis in which developed-Asia hedge funds outperformed emerging-Asia funds.

Within the Asian hedge-fund industry, equity-hedge and event-driven strategies, which include distressed and shareholder activist funds, have seen the most significant increases in assets since Q1 2009, says HFRI. The percentage of capital in Asian equity-hedge funds is nearly twice the figure for the overall industry, with much less capital focused on macro and event-driven strategies.

"Asian hedge funds were confronted with a variety of divergent market influences in the first quarter, and investor flows to Asian hedge funds reflect this," said Ken Heinz, president of HFRI, who cites sovereign credit risk as the main investor concern currently.

Other factors include a cyclical upturn in developed markets based on improving earnings and corporate credit, falling equity market volatility and continued regulatory pressure on hedge funds and financial institutions, says Heinz.

GFIA makes a similar point in its April report published on Friday. "After a strong rally in March, market participants are getting cautious, and most markets traded around news flows in April," says the firm. "The most prominent issue was the mounting debt problems of Greece and Portugal, which continue to haunt investors globally."