Total assets invested in Asian-focused hedge funds rose only fractionally in the second quarter of this year as losses from volatile performance were offset by new capital inflows from investors, according to Chicago-based industry data provider Hedge Fund Research.

Asia-focused hedge funds grew by around USD200m, or just 0.25 per cent, as a net capital inflow of more than USD530m was partially offset by a performance-based decline of nearly USD320m.

The inflow total represents a drop of nearly 50 per cent from around USD1bn in new investment gathered by Asia funds in the first quarter. Total capital invested in the Asian hedge fund industry stood at USD100.48bn at the end of June, up from USD100.26bn at the end of the first quarter.

The HFRI Asia (ex-Japan) Index fell more than 2.2 per cent in the second quarter, bringing the year-to-date decline to 13.8 per cent, while the HFRX Japan Index gained over 4.8 per cent, narrowing its year-to-date loss to just over 7.1 per cent.

According to HFR, investors displayed a strong preference for arbitrage strategies and regional exposure in Asia, amid significant realised volatility. Arbitrage funds saw assets grow by over USD730m, while assets committed to event-driven funds fell by more than USD525m.

The performance-based decline in assets was concentrated in equity hedge strategies, which declined by over USD600m in capital, while the less directional macro and arbitrage strategies posted gains for the period. Consistent with the trend observed in the first quarter, investors reduced exposure to Japan but increased it to emerging Asia.

HFR notes that despite the performance volatility, equity hedge strategies continued to account for over 63 per cent of assets under management and more than 74 per cent of the total number of Asia-focused funds.

Among sub-strategies, equity hedge fundamental growth saw the largest inflow with more than USD1.19bn, followed by relative value multistrategy with USD702m. However, equity market neutral and fundamental value strategies suffered a combined capital withdrawal of more than USD1.1bn.

"Asian hedge fund investors reacted to continuing market volatility by adjusting allocations opportunistically to those regional markets that had posted sharp year-to-date losses," says HFR president Kenneth Heinz.

"Compared with the rest of the hedge fund landscape, the Asian hedge fund industry has a much higher percentage of equity hedge strategies, and a lower proportion of macro strategies that have posted strong gains throughout the volatility of 2008.

"This disparity in strategy composition, which had a positive influence on results for Asian hedge funds for the five-year period up to 2007, has adversely impacted the regional industry performance so far this year."

HFR's data is based on more than 12,000 funds tracked historically by the firm, including more than 7,600 funds reporting as part of the HFR Database subscription product. Founded in 1993, HFR Group is a provider of hedge fund data, research, indexation and asset management products and services, including the HFRI and HFRX indices of hedge fund industry performance.


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