Asia Hedge Funds Bounce Back But Still Underperform Long-Only

"The only thing that you owe the public is a good performance."

Humphrey Bogart, actor (1899-1957)

Data from HSBC Private Bank, Alternative Investment Group (Hedgeweekly #53) suggests that a healthy number of Asia dedicated hedge funds ended 2009 on a positive note, although maybe not a relatively high one when compared to long-only alternatives.

By category, multi-strategy players ended the year close to an average of 4.99%, in large part driven by the reinvigorated performance of George Long's LIM Asia Multi-Strategy Fund Class A which through Nov 30 ended up 18.78%. In contrast, the Dec 18 number for Richard Margides' Artradis Barracuda Fund limped in at a -11.92% as his heavily volatility-based strategy back-fired throughout 2H09. When compared to global multi-strategy managers this was very poor as HSBC points to an average return of 16.74% (largley on successful bets in credit and convertible arbitrage instruments).

Diversified equity (which typically implies long/short) in Asia put up a credible 17.94% in 2009. Leading performance managers included Boyer Allan's Pacific Fund Inc (A) which posted a 35.07%, Ezra Sun's The Real Return Asian Fund Ltd was up 37.29% and Richard Chevenix-Trench's SR Global Fund B was up 29.37%. The latter is notable as it is a fund (like Joho) with assets over the billion $ mark. Sadly, the relatively small size of many Asian funds continues to put a cap on their ability to attract significant institutional assets which, by definition, will tend to herd towards the bigger US and European managers that might have Asian exposure through their night-desk operations.

The weakest performers in the HSBC listing in the diversified equity Asia, were Kyung Hwa Park's Corevest Partners Limited at --0.34% through Dec 11 and Alex Lewis' MBAM Pan-Asian Fund Ltd at -0.32%. Both funds had assets just over the $100 million mark.

Among diversified equity Japan managers the performance picture was mixed. Average fund performance through 2009 was up 4.06% led by Bob Macrae's Arcus Japan Fund (Yen) which was up 30.70% as of Dec 29 as well as a solid bounce back year by Mike Hill's Blue Sky Japan Ltd which was up 24.46% as of Nov 30. In contrast, Hugh Sloane's SR Global Fund H - Japan was down -19.25% while Warwick Johnson's Optimal Japan Fund C1 suffered a -9.20% decline. Of note, aggregated assets in Japan among this strategy fell sharply year-on-year and continues a trend that appears to have set in since 2006/07 of bleeding assets as performance slides.

The poor overall performance of Japanese equity markets is worrying on a number of levels - especially as alternative geographies in the region may attracting an increading portion of discretionary portfolio investment assets. As long as many long/short managers in Japan have high drawdowns, investors will be right in questioning the effectiveness of risk management and the ability to short.

In the multi-strategy Asia category, Bennelong Asia Pacific Multi-Strategy Fund Ltd. was down -17.47% while PMA Asian Opportunities Fund was up 6.02%.

Of course, some institutional investors are not blind to the incredible bounce back that stock markets endured from March 2009. For many of them exposure on the long-side through low-cost ETFs via astute tactical allocation paid off handsomely. Just looking at the trough to high point performance of many of these liquid ETFs may in fact tell the real story about Asian hedge funds asset losses through 2009: Japan +149%, Hong Kong +186%, South Korea +238% and India +368%.

For many investors, going long-only Asia (as with emerging markets in general) was the big winning strategy in 2009 and potentially for 2010. Who knows? Mahalo.