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Japanese hedge funds lead Asian hedge fund capital to five-year high

Investors increased allocations to Asian hedge funds in 1Q13 as stimulus measures, quantitative easing and increased bond purchases by the Bank of Japan drove gains across both Japanese equities and the HFRX Japan Index.

Total Asia-focused hedge fund capital increased by 7.6 per cent in 1Q13 to nearly USD95bn (JPY9.4trn), reaching the highest level since Asian hedge fund capital peaked in 2007, according to the latest HFR Asian Hedge Fund Industry Report, published by HFR.
 
Investors allocated over USD1.3bn in net new capital to Asian hedge funds in 1Q13, the largest quarterly inflow since 3Q11, as the total number of Asian hedge funds increased to more than 1,150.
 
The HFRX Japan Index posted a gain of 11.7 per cent for the quarter, the strongest quarterly gain since 4Q05, exceeding the 1Q13 gain of the S&P 500, although trailing the torrid gain of over 19.0 per cent for the Nikkei 225. HFR estimates nearly 370 hedge funds invest primarily in Japanese capital markets, including equity, debt and currency, while an additional 270 funds invest across pan-Asia (including both emerging and developed) and over 500 funds invest in emerging Asia.
 
Hedge fund performance across emerging and blended, pan-Asian exposure was also strong for the quarter, with the HFRX China Index gaining 6.9 per cent, HFRX Equal Weighted Asian Index gaining 8.4 per cent and the HFRX Asian (ex-Japan) Index gaining 6.7 per cent; each outperforming the decline in the Shanghai Composite Index. Reversing a portion of the strong gain of 27.6 per cent from 2012, the volatile HFRX India Index posted a decline of 7.5 per cent in 1Q13.
 
The trend toward establishing a hedge fund’s management firm in local Asian markets also continued, with the percentage of Asian hedge funds located in China, Singapore, Japan and India all increasing since 1Q12, while the per cent of these located in the US and UK continues to decline. Nearly one third of all Asian hedge funds are now located in China, while nearly 11 per cent are located in Singapore; the number of funds located in Japan and Australia combined for over nine per cent.
 
Despite the development of sophisticated macro, relative value arbitrage and event driven strategies, the Asian hedge fund industry continues to be heavily skewed toward equity sensitive exposures; over 70 per cent of all Asian hedge fund capital continues to be concentrated in equity hedge strategies, compared with nearly 27 per cent for the overall global hedge fund industry. Although the macro environment for currency trading has been dynamic, only about five per cent of Asian hedge funds are macro hedge funds, including quantitative CTA and discretionary macro funds which invest long and short across equity, fixed income, currency and commodity strategies.
 
“The past four months have been an unprecedented period for Japanese capital markets and have created tremendous opportunities for Asian hedge funds in 2013,” says Kenneth J Heinz, president of HFR. “Aggressive stimulus measures by the Bank of Japan have not only created opportunities in Japanese equity markets, but also driven down yields in global fixed income markets, increased currency volatility and contributed to recent commodity volatility as the global growth and inflation picture continues to evolve. Hedge funds in Japan and throughout Asia will continue to benefit from these developments and are likely to attract increased investor capital to access these powerful and pervasive market trends.” 

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