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Fifth consecutive month of net allocations for hedge funds… Japanese funds boost assets by 20%…

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Hedge funds witnessed the fifth consecutive month of net allocations in May, despite global markets experiencing mixed returns.

According to Eurekahedge, May saw the seventh consecutive month of positive returns, posting year-to-date returns of 3.89 per cent. The total asset flows for 2013 currently stand at USD50 billion with total size of the industry pegged at USD1.87 trillion.

Despite the MSCI World Index down by 0.45 per cent in May, the Eurekahedge Hedge Fund Index was up 0.20 per cent.

The month of May began on a good note with a positive flow of economic data emanating from the US, resulting in rallies in global equity markets. North America’s indices reached all-time highs. The US dollar also appreciated against several major currencies with the US dollar crossing the crucial 100-mark against the Japanese yen. However the positive sentiment got punctured with poor manufacturing numbers reported by China and rumors spread on a possible withdrawal of the US Federal Reserve’s stimulus program.

Asia ex-Japan hedge funds outperformed underlying markets for three consecutive months. These funds were up 3.26 per cent since the end of February.

The HFRX Multi-Emerging Market Index provided a 5.9 per cent return through April, with Asia hedge funds posting strong performance, Chinese funds generated 8.8 per cent return, while Korean funds were up by 10 per cent and Asia ex-Japan funds generated 8.1 per cent return. In May Asia ex-Japan hedge funds reported the strongest returns during the month.

The managers outperformed the market for the third consecutive month gaining 2.35 per cent in May while the MSCI Asia Ex Japan Index was down 4.35 per cent. Incidentally the largest returns were posted by funds focused on Greater China, which was up 4 per cent in May.

Japan-focused hedge funds may see their assets increase 20 per cent this year on expectations that Prime Minister Shinzo Abe’s policies and stimulus measures will boost growth, according to Eurekahedge Pte.

About USD3 billion could be added to the USD15.1 billion managed by hedge funds investing in Japan at the end of April, according to Eurekahedge. Of the increase, USD1 billion may come from performance gains, while investors would allocate the rest.

The increase would be the “first real recovery” since 2005 when funds focused on the world’s third-largest economy grew 56 per cent to USD33.6 billion as then Prime Minister Junichiro Koizumi led banking restructuring to boost growth. The Eurekahedge Japan Hedge Fund Index rose 17.7 per cent this year through May as Abe’s policies dubbed Abenomics weakened the yen, helping exporters and boosting stocks.

Still, assets at Japan-focused funds are more than 60 per cent below a peak of USD39 billion in 2006. For Asia-ex Japan hedge funds also, the biggest hurdle is fundraising. Assets at these funds peaked in 2008 at USD154.7 billion and have fallen to USD123 billion following the global financial crisis in 2008.

Over 70 per cent of all Asian hedge fund capital continues to be concentrated in equity hedge strategies, compared with 27 per cent for the global hedge-fund industry, according to Chicago-based Hedge Fund Research Inc.

Asian stock markets endured sharp losses last week as volatility on the Tokyo market continued — fueled by worries about a surging yen and monetary policies in the US

Investor skepticism about the economic strategies of Prime Minister Shinzo Abe for extracting Japan from two decades of stagnation also figured high in the Nikkei 225’s big drop.

Japanese media reports said overseas hedge funds may be dumping Japan’s equities following disappointment over the Bank of Japan’s decision earlier in the week to refrain from additional monetary easing measures.

The Nikkei 225 index, which plunged more than 6 per cent earlier in the day, was 5.3 per cent down by mid-afternoon to 12,571.47.

Adding to the woes was the dollar’s recent fall, trading at about 95 yen Thursday, in a reversal from 100 yen earlier. A cheap yen is a boon for Japan because it helps the nation’s giant exporters by raising their overseas revenue when translated into yen.

Elsewhere, the Hang Seng index fell 2.9 per cent to 20,731.52, while the Kospi in South Korea lost 1 per cent to 1,891.10. Benchmarks in India, Indonesia, Singapore and Taiwan all fell 1 per cent or more. Thailand’s SET plummeted 5.2 per cent.

Mainland Chinese were pummeled as accumulating signs of a slowdown in growth in the world’s No. 2 economy caused investors to retreat. The Shanghai Composite Index slid 3.3 per cent to 2,137.37 while the smaller Shenzhen Composite Index lost 3.1 per cent to 952.76.

"Risk appetite continues to shrink as the ongoing nervousness over Fed tapering continues to provoke significant position adjustments across markets," Mitul Kotecha of Credit Agricole CIB in Hong Kong said in a market commentary.

Aggressive monetary policies, announced in April, have sent Japanese government bonds, the nation’s equivalent of US Treasury notes, into a whirl of volatility- voltaility that some hedge funds are looking to cash in on.

The yield on benchmark 10-year bonds shot up to 1 per cent for the first time in a year late last month, although it eventually stabilised. Although Abenomics has generally lifted Tokyo stocks and lowered the yen the bond market that keeps Japan’s government afloat is growing ever nervous.

The sell-off in bonds last month was one sign of the panicky mood and occurred despite the Bank of Japan’s constant presence in the market, buying up more than half of government bonds for the next two years.

A handful of overseas hedge funds are seeking to make a killing on the gloomiest scenario for Abenomics by trading in futures. They are counting on what they see as an inevitable catastrophe. If bond prices do crash, their owners, mostly Japanese financial situations, will lose a major chunk of their assets overnight.

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