2011: Hard Times

"Misery is when you heard on the radio that the neighborhood you live in is a slum but you always thought it was home."

Langston Hughes, Black Misery, 1969

For a majority of hedge funds, 2011 net of fee performance numbers do not make inspiring viewing. According to the mid-July HSBC Hedge Weekly #29 edition there are no Asian-focused hedge funds in their top twenty YTD tables (top: JAT Capital Offshore Fund Ltd., up +29.64%).

However, there were a couple of Asian names in the top twenty worst performers: Bennelong Asia Pacific Multi-Strategy Equity Fund Ltd., and, Blue Sky Japan Ltd - Class A which were down -13.54% and -9.92% respectively.

The picture is equally depressing when looking at equal-weighted performance by strategy. For example: Equity-Diversified Asia is +1.05% YTD (led by PinPoint China Fund Class A USD +11.48%) in which 9 out of 16 managers scraped a positive YTD so far; Equity-Japan is -1.17% YTD (led by AlphaGen Hokuto +1.71%) but in which 4 out of 8 funds are producing negative returns YTD; Diversified Asia represented by only 2 funds is +1.58% led by Brevan Howard Asia Fund Ltd. +3.15%); Discretionary-Japan is up +5.30% led by DB Equilibria Japan Fund Ltd. which posted +6.94%.

Of note, those diversified strategies that purported to be better able to spread risk and capture some of the global themes, mis-pricings and arbitrages appear to have suffered a lot worse than anticipated. In many instances there have to be at least some beta-drivers at work long enough in order to generate decent returns. This does not appear to have been the case as risk-on and risk-off themes have been more volatile than anticipated.

In addition, the China story has quietened down somewhat in the face of monetary discipline; there has been heightened geopolitical risk in various regions to cool investments in general; Japan's tsunami/nuclear issue depressed regional growth and stocks a little longer then expected; US debt default risk has also forced many larger institutional investors to take a sit and wait in non-US assets; while Asian commodity plays via mining stocks have lagged spot gold and metal prices over the last 6 months; and, IPO activity has been quiet too.

With a majority of Asian hedge funds failing to even make up the global hedge fund average of +1.65% on a YTD basis (DJ CS Hedge Broad Hedge Fund Index, through June 2011) the reality is that short term capital allocations are likely to remain very scant when applied to Asia in the short term.

Certainly, the high net worth segment including HFoFs will likely not make any allocations heading into the end of 2011 stretch leaving the bulk of new monies coming from institutional investors - and these will almost certainly go to the multi-billion dollar managers trawling global markets and producing 5-8% promised annual returns, except that even this year those numbers might be difficult to achieve. Hard times. Mahalo.