By Neil Wilson
It's been one hell of a rollercoaster ride in the past year for hedge funds in the Asia-Pacific. Average performance in 2008 was by some distance the worst among the major hedge fund regions, and a higher proportion of Asian funds have been forced to close down - with about 20% of them disappearing from the AsiaHedge database in less than 18 months.
Asian markets have of course been through huge boom-and-bust cycles before - and it seems almost characteristic for markets in Asia to turn around in a heartbeat. So, although it may be highly premature to conclude that we are on the threshold of another raging bull market, there are already signs of possible rich pickings for the survivors of 2008.
May was just about the best month for hedge funds globally for more than a decade. And in few areas was performance as strong as in Asia, where long/short equity strategies in both Asia including and excluding Japan delivered median returns of more than 10%. For some single-country strategies, such as Indian equities, the bounce was even more forceful - with median gains of over 25%.
In a region where the industry is still dominated by long/short equity strategies, this recovery has provided some welcome relief. And, anecdotally, it accompanies a slowdown in if not an end to the recent cycle of heavy redemptions and shutdowns in the region.
For much of the previous year, managers in the Asia-Pacific had been hit hard by what seemed like an even worse "perfect storm" than that afflicting the United States and Europe. Not only were equity prices collapsing and liquidity disappearing - characteristic of a down cycle in Asia. But with most Asian funds having such relatively straightforward strategies, they also typically have very easy liquidity terms - which led to an even more pronounced "ATM effect" when investors rushed to pull allocations.
Given such a powerful wave of redemptions, deleveraging and forced selling into the markets, it should have come as no surprise that markets in Asia generally fell further and faster than those elsewhere - and that most funds struggled to cope.
The general pattern of worse returns from the Asia-Pacific confirmed the suspicion of many skeptical investors who felt that all too many so-called "hedge funds" in Asia were merely "long-only funds in drag." And many of the skeptics will doubtless feel, concomitantly, that any recent bounceback suggests that if Asia presents a big opportunity now then it is much more of a long-only opportunity than it is for hedge funds.
There are without doubt some grains of truth in this line of critical analysis. But there are some good counter-arguments too - reasons that hedge funds, or at least the best ones, will continue to be a very appropriate and successful way to invest in Asia.
For one thing, long/short equity may be dominant but it is far from being the only hedge fund style in Asia. Some of the biggest funds managed in the region - such as the $4 billion Artradis volatility trading strategy managed by Richard Magides and Steve Diggle out of Singapore and the $2 billion-plus Brevan Howard Asia macro strategy managed by Kaspar Ernst out of Hong Kong - delivered double-digit returns in 2008, and are up again so far this year.
Second, although Asian funds did on average suffer steep losses in 2008 - with the AsiaHedge Composite median down 14.76% and mean average returns for Asian equity funds down over 20% - they still did a lot better than the regional markets in a year when the MSCI Pacific Free index fell by more than 36%. The ability to hedge did offer at least some protection on the downside.
Third, and perhaps even more important, the operating environment for hedge funds in Asia has arguably become more benign than that in any other major region. Unlike in the United States and Europe, for instance, regulators in the Asia-Pacific - with the important exception of Australia - did not respond to the financial crisis by imposing any new restrictions on short-selling.
This represents a big change from the days of the late 1990s - when, during the Asian financial crisis, hedge funds were widely viewed around the region as Public Enemy No. 1. This time, as the United States and the European Union are toying with new rules that may restrict hedge funds, and the United Kingdom is proposing tax increases that may encourage managers to move, Asian centers such as Hong Kong and Singapore could benefit.
Last, there is Asia's position in the global economy and markets - and in particular its big emerging economies such as India and China - which is clearly rising. When the furore over what did or did not happen in 2008 finally subsides, smart investors are surely going to want a bigger and not a smaller exposure to the smartest hedge funds in the region.