Asian hedge funds beat global peers in August as Europe’s deepening sovereign debt crisis and Standard & Poor’s cut to the U.S. credit rating sparked the worst month for the industry in almost three years.
About 80 Asia-focused hedge funds reported an average 2 percent decline and median loss of 1.5 percent last month, according to data from Credit Suisse Group AG’s prime brokerage unit. Hedge funds worldwide lost on average 3.5 percent, the worst month since October 2008, according to Hedge Fund Research Inc.’s HFRX Global Hedge Fund Index.
Funds run by Vulpes Investment Management, Titan Capital Group LLC and Juggernaut Capital Management helped Asian hedge funds last month overcome a history of underperformance in market slumps. Asian strategies lost 21 percent in 2008, compared with the average industry decline of about 11 percent, according to Singapore-based Eurekahedge Pte.
“Asian hedge funds have done a great job of managing risk amid volatile markets,” said Matt Pecot, head of Asia-Pacific prime services at Credit Suisse in Hong Kong. “This resilient performance is a strong affirmation of the increasing sophistication of Asian managers, and a positive signal for greater capital flows into hedge funds active in the region.”
Investors poured $2.6 billion of new capital into Asia-focused hedge funds in the second quarter, according to Hedge Fund Research. Their assets stood at $89.5 billion in the second quarter, accounting for about 4 percent of the $2 trillion industry, according to the Chicago-based firm.
The MSCI Asia Pacific Index declined 8.6 percent last month, the most since May 2010, amid concern global economic growth is slowing as Europe’s sovereign debt crisis spreads and after S&P cut the U.S. sovereign rating. The measure has slumped 14 percent from this year’s high on May 2.
“The industry in Asia was already cautiously positioned after the month of May, so funds entered August with low gross and net exposures, and traded the markets reasonably well,” said Stephane Pizzo, founder of Singapore-based Lotus Peak Capital, whose fund of funds fell about 0.75 percent in August.
Asian managers reported returns which ranged from a gain of 13 percent to a 16 percent loss, according to Credit Suisse.
About 25 percent of the 80 Asia-focused funds tracked by Credit Suisse reported gains in August, including equity long-short, macro and volatility strategies, according to the Zurich-based firm. The returns clustered between 2 percent and 5 percent, according to its prime brokerage unit.
Evidence of Change
“Investors often expect Asia hedge funds to lose money in a down market; that was certainly their experience in 2008,” said Ben Happ, Hong Kong-based Asia-Pacific region head of capital services in Credit Suisse’s prime services division. “The August performance is evidence of the change that Asian hedge fund managers have made with respect to risk management.”
The VIX, a measure of market volatility known as Wall Street’s “fear gauge,” soared 50 percent to 48 on Aug. 8, the biggest gain since February 2007. The gauge fell 4.7 percent to 33.92 last week after increasing four straight months.
Vulpes Investment Management’s long Asian volatility and arbitrage fund, LAVA, advanced about 4 percent last month, said Stephen Diggle, the firm’s founder. The manager profited from bets on derivative positions on gold, debt and Australian interest rates, he said.
Europe faces political and legal tests this month including a series of ratification votes on its rescue fund, known as European Financial Stability Facility, that could lead to “serious market dislocations,” Diggle said.
“September could be a pivotal month with the situation in Europe possibly deteriorating,” Diggle said.
The Titan Asia Volatility Fund, managed by New York-based Titan Capital, gained 4 percent in August, bringing its return this year to almost 29 percent, according to a newsletter sent to investors.
Sinfonietta, an Asia absolute return fund run by Symphony Financial Partners, advanced almost 15 percent in August, contributing to a gain of about 26 percent this year, according to David Baran, its Tokyo-based founder.
Juggernaut Asia Fund, an equity long-short fund, advanced 3.8 percent in August, its first month of trading, said Yashwant Bajaj, founder of Singapore-based Juggernaut Capital Management.
The fund kept a “very low gross exposure” in the first two weeks of August and took more risk when volatility started to abate at the end of the month, according to the manager. Long-short managers buy stocks they expect to rise and hedge those bets with sales of borrowed shares they hope to buy back at a cheaper price.
“We looked opportunistically where the market was pricing in ‘the-end-of-the-world’ in simple terms,” Bajaj said. “We took a position contrary to that.”
The Riley Paterson Asian Opportunities Fund gained about 3 percent last month, according to the manager.
“The perilous state of western world finances and Asia’s cyclicality increasingly means being alert to macro is important,” said Singapore-based Daren Riley, co-portfolio manager of the fund who analyzes macroeconomic cycles before betting on the market at Riley Paterson Investment Management.
Singapore-based Quantedge Capital, which uses statistical models to pick trades, said its quantitative global macro fund rose 2.4 percent in August, contributing to a 40 percent advance this year, according to a newsletter sent to clients. Its losses in equities were “more than offset” by gains in bonds, the manager said in the newsletter.
“We expect fluctuations in risk appetite to cause short-term volatility in our fund’s returns,” Quantedge said in the newsletter. “The upside is that higher-than-average risk aversion will correspondingly reward our strategy with higher-than-average returns over the medium-to-long term.”
The $2.9 billion Ortus Fund Ltd., a Hong Kong trader of currency-related securities, fell 0.5 percent in August, trimming its year-to-date gain to 5.2 percent, a person with knowledge of the matter said, asking not to be identified because the information is private. Ortus’s President Bill Lu declined to comment.
The Dymon Asia Macro Fund declined 0.25 percent last month, bringing its return to about 14.5 percent this year, said Danny Yong, chief executive officer of Singapore-based Dymon Asia Capital, which manages about $1.5 billion. The firm’s Dymon Asia Currency Value Fund rose about 2 percent in August, he said.
Almost half of the Asia-focused hedge funds that Credit Suisse tracked were flat to down 5 percent in August, according to data compiled by the prime brokerage unit. About 25 percent of the funds reported losses of at least 5 percent and were mainly long-biased Asia or China equities strategies.
The LBN China+ Opportunity Fund, a long-short fund focusing on China stocks listed in Hong Kong, is estimated to have declined 2.24 percent in August, following a gain of 9 percent in the first seven months of the year, Benjamin Chang, chief executive officer of Hong Kong-based LBN Advisers Ltd., said in an e-mail to clients.
“August was definitely the most difficult month year to date for many managers, but this isn’t 2008,” said Sam Tabar, Hong Kong-based head of Asia-Pacific capital introductions at Bank of America Corp.’s Merrill Lynch & Co. unit. “We don’t have the same kind of liquidity issues or the mismatch of assets and liabilities as we did in 2008. For this reason, we don’t think we will be seeing the same mass redemptions that we saw in 2008.”