Asian First Quarter Fund Performance: A Mixed Bag

"When angry, count ten before you speak, if angry speak a hundred".

Thomas Jefferson (1743-1826)

3rd President of the United States

According to a recent HSBC Hedgeweekly newsletter, Asia Multi-Strategy category funds were down by a collective -2.86% over the first quarter. Of equal note, were the lower assets of those funds following a trend that turned sharply lower beginning in the summer of 2008. Not a good sign.

Their Equity-Diversified Asia category of funds were also down on an equal-weighted basis in the first quarter to the tune of -1.26%. Again, 15 out of a total 22 funds produced negative returns while overall assets again appeared to "bleed" over this period. These are funds that tend to be long/short equity with a regional Asia focus.

A rosier picture was provided by hedge funds with a focus on Japan. According to the data, the Equity-Diversified Japan category of funds produced an average return over the first quarter of approximately 6.30%. This is news! A total of 8 out of 12 funds produced positive returns. That said, another worrying sign was the noticeable fact that the individual assets of these funds in their survey were by any accounts, small (of the sub-$200 million).

Over the same quarterly period, standout positive performers included: Scott Booth's Eastern Advisors (+19.80%), Bob MacCrae's Arcus Japan (+15.31%) and Lesley Kaye's GAM (+13.33%). All in all, a mixed bag in terms of hedge fund performance in Asia with those funds focusing on Japan the standout winners.

There are a number of subtle interpretations. First, the global number of Asia-specific funds has fallen "off a cliff" since the credit crisis and this might have to do with poor performance. A second theory posits that the biggest investor group in Asia over the last 10 years were hedge fund of funds and as these vehicles have been hammered by poor performance and equally poor liquidity they have pulled investments en masse from the single manager universe. Certainly, the anecdotal evidence supports this theory.

Further, another investor group and seeder of many funds - Japanese institutional investors - has been bailing out of the regions funds and has done so in size. One need only think about the number and scale of Japanese trading companies that have effectively shut down their overseas hedge fund of fund operations over the last 24 months adn this group alone had a combined $4-6 billion in combined, investable assets!

A more hopeful theory suggests that the "old guard" of Asia-based hedge funds have been shunned by investors in favor of a new selection of managers who are not on the HSBC radar screen. This may well be possible. Although, the pain suffered by hedge funds in general in the west suggests that investors have simply been in redemption mode and have shifted among some of the remaining vehicles rather than supporting a fresh selection of up-and-coming managers.

So much for US and European prime brokers proclaiming 6 months ago that the Asia prime brokerage business was heading into a boom - maybe that was hope rather than reality. Expect many of them to slowly start retrenching also as all boats slowly sink in the current environment.

Until local institutional investors come back, the region will be a toxic trading ground. The good news is that any capable manager will probably not be involved in any crowded Asian trades for now - unless they are liquidating with the broader, schizophrenic markets...Mahalo.