Data taken from Preqin’s Hedge Fund Analyst, reveals that Asia-based fund managers have outperformed non-Asia-based managers so far in 2014, when focusing on investments in Asia. These local managers have returned 5.10% since the start of the year, compared to 2.25% of all managers outside Asia making investments in the region. We examine the factors that have contributed to this outperformance and pose the question: ‘Should investors be placing higher fund allocations with Asia-based managers when investing in Asia-focused funds, in order to secure more favourable returns?’
As Preqin Investor Outlook: Alternative Assets H2 2014 shows, investors look at a wide range of variables when considering investment in hedge funds, but absolute performance remains a primary objective, especially generating a long term risk-adjusted return. Over a five-year time horizon, using data from custom benchmarks created on Preqin’s Hedge Fund Analyst online service, regional-based hedge fund managers continue to outperform those managers investing in Asia from outside the region, generating annualized five-year returns of 9.90% compared with 6.98%. Fund managers investing in their local regions have demonstrated their regional expertise, giving them a competitive advantage through the superior performance of their funds.
Since 2008, both sets of managers have experienced two years of negative returns. Despite Asia-based managers beating their global peers when investing in local markets over the long term, Preqin’s data reveals that during a downturn in the markets, Asia-based managers tend to post larger losses. In 2011, both groups recorded negative returns: -6.84% for non-Asia-based managers compared to -8.60% for those Asia-based. In 2008, during the last major global crisis, the fund managers investing in Asian markets from outside the region made losses of -17.20% for the year, versus -28.20% for those fund managers based within the boundaries of Asia. As a result, Asia-based funds exhibit higher volatility than their counterparts investing in the region from outside its borders. Despite the increased volatility, the funds which invest in Asia and are managed by firms based in Asia exhibit stronger risk-adjusted returns. The three-year Sharpe ratio for these funds is 0.63, compared to 0.49 for those funds investing in Asia but managed by firms outside of the region.
Over the past five years, Asia-based hedge fund managers have generated higher absolute returns than their peers based outside the region when managing Asia-focused hedge funds. Local expertise and a willingness to take on additional risk have paid off for these managers with stronger risk-adjusted returns posted by these funds. However, performance is not the only variable investors look for when deciding on allocation, other leading key factors include good fund track record and management experience. Typically, the fund groups based in North America and Europe are the ones that exhibit these characteristics, and as a result many investors will choose to invest in funds based in these established centers when allocating capital to Asia. However, as Asia as a center for hedge funds matures, these differentials should carry less weight, allowing investors more options when making allocations to Asia-focused funds, which could further boost the hedge fund industry in this region over the longer term.