James Williams, news editor, Hedgeweek

Asia’s investment gurus hurt by China exposure, Asia ex-Japan hedge funds deliver double-digit returns for 2012

A strong end to 2012 saw Asia ex-Japan hedge funds deliver some solid results in what is sure to provide a welcome fillip to the region’s alternative funds industry. The Eurekahedge Asia ex-Japan Hedge Fund Index ended 2012 with returns of +10.5 per cent, a seismic shift in fortunes in comparison to 2011 which saw losses of -12.4 per cent.

Strangely, though, money did not seem to follow performance. According to Eurekahedge’s latest report Asia ex-Japan saw a net loss of USD0.3billion compared to net inflows of USD1.3billion in 2011, suggesting that investors shied away from the region because of the poor performance seen in the previous 12 months. In comparison, North American hedge funds attracted USD24.3billion in net inflows in 2012.

Maybe the double-digit returns – way ahead of the 4.85 per cent average return for global hedge funds, according to the HFRI Fund Weighted Composite Index – will, however, convince global investors in 2013 to keep faith with Asia-focused fund managers. Everyone is waiting for the floodgates to open with respect to asset inflows into Asia: another strong year of performance should help bolster assets, which, at USD144billion, are still some 30 per cent off their high-water mark of 2007.

As reported in an article by Absolute Asia (part of Investment & Pensions Europe) this week, citing data by a leading industry publication, nearly 78 per cent of Asia Pacific hedge fund assets are now run out of the region, compared to 74 per cent in 2010 and around 50 per cent in 2000. This underscores the benefit of having an on-the-ground presence to react quickly to developments in Asian markets and gain a deeper understanding of regional dynamics. The article points out that the region is also developing in respect to the breadth of strategies, with long/short equity funds, for so long the major strategy, now accounting for just over a third of the total strategies as managers become more sophisticated and diverge into more complex and idiosyncratic fund strategies: in particular credit-focused and quant-based funds.

The article notes that experienced managers have successfully executed such market neutral strategies, achieving annualised returns of 9-10 per cent. Mainland China is a hotbed of quantitative managers. And as the country steadily opens up to hedge funds by lowering the minimum criteria for managers to be awarded Qualified Foreign Institutional Investor (QFII) licences, (needed by global hedge funds to raise assets from domestic investors), the potential for joint ventures between global quantitative fund managers and indigenous fund managers in the near-term could be substantial.

Finally, Asia’s star fund managers failed to deliver in 2012 on the back of making wrong calls on China reported Reuters recently. Franklin Templeton’s Mark Mobius and Value Partners’ Cheah Cheng-hye fell below their benchmarks by the widest margins in more than a decade according to Thomson Reuters Lipper data. Another star manager, Fidelity’s Anthony Bolton, also failed to beat his benchmark, noting that the Chinese economic slowdown in 2012 “certainly had a negative impact on the consumer sector, an area I am overweight.” All three managers got their positions wrong on China, whose CSI300 stock market fell nearly 9 per cent through November over fears of an economic hard landing and a change in the political leadership.

Bolton’s exposure to China consumer stocks worked against him, leaving the Fidelity China Special Situations fund up 5.8 per cent for the first 11 months of 2012: some 8 percentage points behind the benchmark MSCI China Index. Mobius’s Templeton Asian Growth fund was also hurt by China exposure, where almost 30 per cent of the USD16.9billion fund is invested. The fund returned 10.6 per cent, 8.3 percentage points behind the benchmark MSCI AC Asia ex Japan index, with Mobius noting that energy stocks were a drag on performance because of swings in commodity prices.

Cheah’s Value Partners Classic Fund fared even worse, lagging some 16.6 percentage points behind Hong Kong’s Hang Seng Index. “This macro-driven year has been a long winter for value investing, as investors have stayed on the sidelines remaining defensive,” commented a Value Partners spokesperson.     

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