Since the US Federal Reserve announced its intentions to continue tapering its quantitative easing (QE) program in January, a wave of unease has swept through global markets, causing them to become more volatile.
Despite this, Asia-Pacific-focused hedge funds have proven able to navigate the uncertainty and have outperformed their benchmarks. For example, Preqin’s preliminary benchmarks for the year as of 31 March 2014 show that Asia-Pacific-focused long/short equity hedge funds posted average returns of -0.32%. Meanwhile, the MSCI Asia-Pacific Index recorded a loss of 1.64% over the same three months. The data also shows that Asia-Pacific-focused hedge funds netted a marginal gain of 0.30% cumulative return overall in the first three months of the year, with funds focused on Asian emerging markets performing especially well with average returns of 2.61%.
Funds managed by Asia-Pacific-based hedge fund managers played a key role in driving the returns of Asia-Pacific focused funds. Preqin’s preliminary benchmarks indicate a cumulative return of 1.01% for the first three months of the year for Asia-Pacific-based hedge fund managers managing funds focused on their domestic region. In the same time period, Asia-Pacific-focused hedge funds managed by foreign fund managers produced a cumulative return of -1.23%. This outperformance may be because fund managers based in the region are able to understand the local economic environment better, leading to them being better equipped to take advantage of available investment opportunities.
One reason for the superior performance of Asia-focused hedge funds compared to an Asian benchmark could be due to lesser research coverage on alpha generation events. Firms experiencing major company-specific events such as a spin-off or an emergence from bankruptcy can change the value of the company’s securities significantly. This allows for potential alpha generation from pricing inefficiencies which create opportunities for hedge fund managers to take advantage of. With hedge funds being relatively new in Asia, and especially so in Asian emerging markets like Thailand and India, funds focused in these areas are able to capture alpha more easily, leading to their outperformance.
With more opportunities available in a less developed hedge fund industry, Asia-Pacific hedge funds look set to continue their outperformance through turbulent global macro events.