Despite 2012 being a year coupled with risks and rewards the year ended on a positive note. All strategic mandates were in the black for December, with multi-strategy hedge funds posting the strongest gains of 2.37% for the month and 8.55% for the year. Hedge funds across all regions witnessed positive returns for the month with Asian hedge funds posting the best performance numbers.
December was a strong month for Japan as Prime Minister Shinzo Abe took to office highlighting an agenda of economic recovery through fiscal stimulus and monetary easing. The Tokyo Topix was up 10.02% last month and the Eurekahedge Japan Hedge Fund Index posted strong gains of 3.27%. Asia ex-Japan hedge funds provided the highest returns against other regions’ performance for the year, up 12.57% after a strong 4.02% in December. Within Asia Pacific, the Eurekahedge Greater China Hedge Fund Index and Eurekahedge India Hedge Fund Index rose 14.60% and 14.93% respectively.
Institutional investors in the West, are prepared to increase allocations to hedge funds, particularly to new, smaller boutique managers. The Concept Capital survey found that 58% of respondents are willing to target managers with less than $50 million in assets under management, while 61% say they are interested in managers with a track record of less than two years.
Concept found 86% of these allocators indicate that they will increase their allocations to hedge funds in 2013; Institutional investors in the West are committed to high return targets, and public securities markets are unable to allow them to meet their objectives, given that interest rates are so low. Therefore institutional investors continue to turn to alternative investments for alpha.
It is typical in the hedge fund universe for smaller, younger firms to outperform the bigger, more established names, something that should be seen as a positive sign by Asia-based managers, many of whom are struggling with issues of scale.
According to a recent AsiaHedge report, total assets in Asia-Pacific hedge funds amounted to $144bn (€110bn) as of June 2012 – still some way off the peak of $192bn seen in December 2007. By comparison, the decline in the number of funds has been more muted, down by only 12% from the peak in December 2009.
The number of funds has remained steady, in part due to the dramatic migration of assets to the Asia Pacific region. According to data from AsiaHedge, $112.2bn, or nearly 78% of the industry’s assets, are now run from within Asian. This compares with 74% in 2010 and around 50% in 2000, when UK and US-based Asia managers largely managed the industry’s assets.
This shift reflects an ongoing and greater commitment to Asian offices by international managers, who are finding it increasingly effective to have a local presence, as this allows for better understanding of and execution in the Asian markets. In addition Asia offers a more favourable tax environment for hedge fund investing, whilst rising Asian affluence provides an accessible pool of demand as investors seek diversified sources of returns.
A notable development in the Asian hedge fund industry is the growing diversity of fund strategies. Just five years ago, long/short equity funds made up close to two-thirds of the strategies available. This dominance has now been whittled down to just over a third as a result of the increase in volume and range of financial instruments traded on various exchanges. At the same time, investors have also been keen to allocate to strategies such as credit-focused, systematic market neutral and special situations, strategies that are perceived to be less crowded than traditional long/short equity strategies.
Asian hedge fund managers’ insurance protection against legal claims for professional wrongdoings lags peers in the U.S. and Europe, according to Citigroup Inc.
Sixty-four percent of 47 managers that run Asia-focused funds in Hong Kong, Shanghai, Singapore and the U.S. own policies including directors’ and officers’ liability, and professional indemnity, according to a survey by Citigroup. That compared with more than 80 percent of European hedge funds in a similar survey last year by Baronsmead Partners LLP.
Asian hedge funds are seeking better insurance protection in the wake of the 2008 financial crisis, which saw a global rush of legal claims as well as in response to demand from their professional fund directors and investors. Harbinger Capital Partners LLC and Tiger Asia Management LLC were among hedge funds slapped with regulator lawsuits for wrongful acts after 2008.