Asian hedge funds focused on investing in China posted sharp gains in October, paring steep declines in Q3 2015, as investor risk tolerance and market liquidity returned to Asian financial markets.
The HFRI China Index gained +5.2 per cent in October, the strongest monthly performance since gaining +14.1 per cent in April, according to the latest HFR Asian Hedge Fund Industry Report, released today by HFR, the established global leader in the indexation, analysis and research of the global hedge fund industry.
Total hedge fund capital invested in Asian-focused funds fell to USD117.5 billion (JPY14432.5 billion, RMB748.3 billion) in Q3, a decline of USD8.7 billion from Q2, the largest quarterly asset drop since Q4 2008. Investor withdrawals in Q3 totalled just under USD1 billion, while performance-based losses approached USD8 billion. Globally, total hedge fund capital fell by USD95 billion in the quarter to USD2.87 trillion.
The performance of Chinese-focused hedge funds fell sharply in Q3, as nearly half the stocks on the Shanghai and Shenzhen exchanges experienced trading halts, prompting formal investigations of Chinese securities firms by local authorities. In an effort to address the broader economic slowdown, the Chinese Central Bank also lowered interest rates in the quarter.
Despite falling -15.4 per cent in Q3, the HFRI China Index has gained +5.2 per cent YTD through October, outpacing the Shanghai Composite Index, which declined -28.6 per cent in Q3.
Hedge funds investing in Japan posted narrow declines in Q3, outperforming Japanese equities over the period. The HFRI Japan Index fell -4.0 per cent in Q3 before gaining +2.9 per cent in October, bringing YTD performance to +7.8 per cent; this compares with a Q3 decline of -14.1 per cent for Nikkei 225.
“Chinese hedge funds experienced extreme dislocations in the third quarter, as investor risk tolerance fell sharply as a result of slowing Chinese economic growth, as well as fundamental structural concerns relating to the reliability of accounting practices employed by Chinese companies,” stated Kenneth J Heinz, President of HFR (pictured). “Many of these concerns moderated in October as investor risk tolerance returned, resulting in strong gains for Chinese hedge funds as they recovered from Q3 losses. While Asian-focused hedge funds offer tremendous growth potential for investors, these highly specialized exposures also require investors to maintain high risk and volatility tolerance over a reasonable intermediate to long term time horizon. Opportunistic investors that are capable of understanding and accepting such risks are likely to benefit from opportunities created by convergence of recent dislocations, as liquidity returns to Chinese financial markets.”
