Capital Flows Into Asian Hedge Funds
Tuesday, February 15, 2011

Asian hedge funds attracted USD500m in net new capital in Q4 2010, with investors favouring strategies offering protection against what many see as an accelerating inflation trend across the region, according to Hedge Fund Research.

Inclusive of performance gains, assets invested in Asia-focused hedge funds increased by USD4.4bn during the quarter, to USD83.4bn, the biggest increase since Q3, 2009. For the full year 2010, assets invested in Asian-focused hedge funds increased by USD6.6bn, the largest calendar year increase since 2007.

Asian hedge funds posted gains in both the last quarter of 2010 and for the full year. In Q4, the HFRX Japan Index climbed 5.87%. Funds focused on investing in inflation-sensitive India posted the strongest gains, with the HFRX India Index gaining 15.47%. The HFRC China Index gained 9.37% for 2010, trailing other Asian and Emerging Markets for the full year, but preserving capital from the declines and volatility that characterized the broader Chinese equity markets. Across all Emerging Markets, the HFRI Emerging Markets (Total) Index gained 12% for 2010, ahead of the 10.3% increase for the HFRI Fund Weighted Composite Index, a broad-based measure of performance across the entire hedge fund industry.

Investors allocated new capital to funds which characteristically have provided inflation protection and exposure to the developing market for cross-border corporate transactions globally. In Q4, 35% of new investor inflows went to funds focused on Asian equity markets (Equity Hedge). Similarly, for the full year, investors allocated USD765m to Event Driven Asian hedge funds, which include Distressed and Activist strategies.

A combination of performance losses and redemptions reduced the capital allocated to Asian Relative Value funds, a counter-trend to the rest of the global hedge fund industry. Of the four major strategies tracked by HFR, Relative Value funds globally experienced the largest capital inflows and produced the highest returns in 2010, furthering highlighting the disconnect between Relative Value strategies in Asia and the rest of the world; Relative Value funds characteristically employ hedged fixed income positions and utilize variable levels of leverage to execute on their convergence trades.

“Investors continue to allocate to Asian hedge funds but now, more than ever, have indicated a strong and clear requirement for inflation protection in their hedge fund strategies,” said Kenneth J. Heinz, President of Hedge Fund Research, Inc (HFR). “To meet this demand, the Asian hedge fund industry has evolved to offer access to not only hedged equity strategies, but sophisticated currency, commodity, volatility, corporate transaction and fixed income exposures designed to appeal to inflation-sensitive investors in 2011.”