Hedge fund investors developed a central focus on Chinese foreign exchange policy in quarter two 2010, as the Chinese central bank took steps toward increased flexibility of its currency policy.

In anticipation of this, investors allocated over USD360m in new capital to Asian hedge funds, reversing the net asset outflow in quarter one, according to Hedge Fund Research, a provider of information on the hedge fund industry.

Total capital invested in Asian focused hedge funds declined to USD74.4bn, as performance-based losses offset the impact of new investor capital.

Investors allocated broadly across hedge fund strategies and regions, with primary interest in event driven and pan-Asian focus, including both emerging and developed Asian economies.

Event driven strategies, which focus on distressed, shareholder activist, merger arbitrage and other special situations, received the majority of new investor capital. 

Equity hedge and macro funds also attracted new capital, the latter of which focus on global currency, commodity and interest rate positions. 

By geographic focus, investors shifted assets from dedicated Emerging Asia funds into funds focused on Japan and broadly across pan-Asia.

While the dynamics of Asian funds generally mirrored the broader hedge fund industry, they also diverged in some respects. For example, Asian equity hedge funds experienced an increase of USD1.7bn as a result of strong performance over Q2 2010, a sharp contrast to equity hedge funds globally, which experienced a performance based decline of USD23bn in the quarter.

Asian-focused relative value arbitrage funds experienced losses of USD2.6bn as a result of performance, which contrasts to relative value arbitrage funds globally which saw an increase of USD1.1bn.

Asian-focused funds employ higher levels of leverage than US and European funds, with the Asian region having the greatest percentage of funds employing between two to five and five to ten times investment capital.

Hedge Fund Research will host its HFR Industry Summit: Asia 2010 in Hong Kong on 16-17 September at The Four Seasons Hong Kong. The HFR Industry Summit is hosted annually in Chicago and London. This will mark the event’s inaugural appearance in Asia.

“Powerful trends continue to shape the growth and development of the Asian hedge fund industry, as global investors look to access the complex but superior growth dynamics in Asian financial markets,” says Kenneth Heinz, president of Hedge Fund Research. “Access to capital, banking stability, limitations on foreign investment into China, utilisation of listed futures contract on the Chinese equity market and the prospect of modification to foreign exchange rate policy are some of the most central themes, not only to the Asian hedge fund industry growth, but to the global macro framework for investing across asset classes in coming years.”