Don't Panic! July Asia & China-Focused Funds Perform Well

"I don't play the game by a particular set of rules; I look for changes in the rules of the game."

Anonymous Global Macro Manager

The early winners in July are Asia and China-focused hedge funds! You might also include those lucky few that stuck to their guns and aggressively sold those firms with toxic sub-prime exposure.

Data returns from HSBC Private Banking covering approximately 250 hedge funds tell an interesting story that appears to be unravelling since the late mid-month sell off in the MSCI World and S&P 500 indices (down 7% and 6% respectively from their mid-month peaks).

The story this month is NOT that "the sky in hedge fund heaven is falling". In fact, as cyclical macro-economic changes made themselves felt we are likely to witness wider performance dispersion between winners and laggards over July.

In some cases performance was lower than expected but in others it was signficantly higher.

There were NO financial bloodbaths (other than Bear Stears and a few others with isolated exposure to sub-prime debt through levered CDO type structures). It was NOT as bad as the popular media would have us all believe...it never is!

I have highlighted just some of the overall findings pointing out some of the performance winners and laggards. The YTD performance is net of fees and equal weighted so there may be a few distortions. Most performance numbers were as of 7/27 or 7/31:

1/ Fixed Income Arbitrage. One would have thought that this strategy would have been battered like a rag- doll by a combination of the credit spread blow-out and a sickening housing market but results point to pretty decent returns YTD of 5.99% with outstanding performance from MKP Opportunity Offshore (+6.75%) and Obsidian (+4.17%) through 7/27. Clearly, the Cassandras got it wrong here.

2/Macro Diversified Systematic. Yikes on this strategy! Expect a high number of negative numbers this month (as there were earlier in the year). These players were clearly undermined by the severe volatility across most equities, currencies and commodities. YTD average performance is still positive at 6.31% but some of the laggards include: DKR Quantitative Strategies (-5.82%), Eagle Global (-6.26%) and GLG Global Futures (-4.89%). Some of the leaders include: JWH Global Strategies Financial and Metal (+9.55%), MAN AHL Diversified (+5.00%). It was the non-trending nature of some of these strategies, typically that act on medium or longer term signals that were punished. The shorter signal models did well - and, again, a fairly mixed performance bag.

3/ Distressed Securities. The universe is very small here though the YTD performance remains positive at 7.22%. Most managers had a negative month with the standout laggard being Turnberry Capital International (-9.10%). Youch!

5/Multi-Strategy Global. Overall mixed results with the YTD still positive at a very strong 11.72%. One standout winner appears to have been Harbinger Capital Partners Offshore Fund which put up 14.47% through 7/27.

6/Credit Global. Sure there were some negatives this month, but this picture was not completely negative with YTD average performance at 7.41%. GLG Credit Fund (A) was down (-7.71%) although Moore Credit Fund (A) was up 5.98%.

7/ Asia Equity Diversified. This was the sure-fire winning strategy this month with average performance up 21.05% with big gains from 788 China fund (+7.01%), Hamon Oriental Long-Short Fund (12.21%), Sofaer Capital Asian Hedge Fund (+6.15%). It was interesting that this part of the equity world has not caught the U.S. sub-prime flu.

8/ Emerging Markets. This continues to perform well too with a YTD return of 14.14%. Everest Capital Emerging Markets +9.70% and SR Global Fund (G) Emerging Markets +5.85% were clear winners in this sub-strategy.

9/ Global Equity Diversified. They performed relatively well across a number of well-known names including Lone Pinon (A) which returned +5.44% for the month and SCP Ocean Fund at +6.29% ending 7/31.

10/ Japan Equity Diversified. The big winner this month was John Zwanstraa's Penta Japan Fund (C-1) which returned 27.60%. This puts his YTD performance at 65.28%. Wow! This is all the more incredible given that he is doing it with a pretty large AUM of a reported US$890 million. As has been previously stated, it is believed that this has been achieved in the broader geographical context and not simply Japan-related. But as we are looking somewhat at Japan the underlying story continues to be tough going for some managers like Rosehill which returned (-5.94%) and Odey Japan & General (-4.16%).

11/North Amercia Equity Diversified. Up to now a solid YTD performing strategy at 9.79%.The sharp market whipsaw in the month end almost certainly caught many players by surprise including Galleon Captains Offshore (-10.52%), GLG North American Opportunity Fund
(-6.58%) and Hayground Cove Overseas Partners (-6.14%) and the widely reported mis-step by Tudor's Raptor Global (-9.02%).

12/ Global Statistical Arbitrage. YTD performance 0.72%. Tykhe Portfolios returned-7.91% through 7/31 while Ventus Fund was -6.26% through 7/27.

13/ Global Diversifed. This broadly describes the global macro strategy and judging by the YTD performance of 6.35% and despite the wide performance dispersion even here the underlying strategy is still on course to do relatively well this year. In terms of winners, Conquest Macro gained 11.83% (7/31) and Landsdowne Macro Fund +8.17%. On the other side of the coin: Gam Teleos Macro returned -4.49%, Harmonic Global Fund -8.19% and Graham Absolute Return Fund -7.85% all of which far outpaced that of Caxton Global Investment which was -2.91% (again picked up in the popular press).

Overall then, some big winners and a few poor performers across many hedge fund sub-strategies. There have been cyclical changes in many markets rather than earth-shattering secular ones.
Mahalo.