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Global Macro Concerns to put Spotlight on Long/Short Equity Funds within Asia-Pacific - January 2014

by Benson Tay

  • 06 Jan 2014
  • HF

Long/short equity hedge funds based in the Asia-Pacific region have performed well in 2013 relative to their global peers. According to Preqin’s Hedge Fund Analyst, long/short equity funds in the region posted average returns of 18.90% year-to date (YTD) up to the end of November 2013. By contrast, global long/short equity funds have returned 9.36% over the same period.

This difference in performance could conceivably be as a result of several factors. The robust stock market revival in Japan on the back of aggressive monetary policies under Prime Minister Shinzo Abe gave a boost to Japan-focused long/short equity funds, which are typically based in the Asia-Pacific region, and these funds have returned an average of 26.05% YTD. Funds located in Asia-Pacific that focus on the Greater China region also did well, achieving strong returns of 21.49% over the same period.

Over the next year, macro events are likely to put pressure on long/short equity strategies, especially long bias, as major global themes remain unresolved. At the heart of this will be the unwinding of the quantitative easing program in the US, which will put pressure on global stock and bond markets. In Asia, the strong run in Japanese equities in 2013 is unlikely to repeat itself in the near future, as Japan struggles to implement structural reforms. Furthermore, funds investing in emerging markets within Asia such as in Thailand or Indonesia face mounting risks as these countries undergo elections in 2014.

Given this backdrop, investors and managers based in Asia-Pacific look set to be defensively positioned. Fund managers and investors are diversifying away from long/short equity strategies and are increasingly considering event driven or credit-based strategies. Preqin’s Hedge Fund Investor Profiles shows that although 56% of investors based in Asia-Pacific are currently invested in long/short equity, only 35% are planning to invest in the strategy over the next 12 months. On the fund side, although 56% of the funds managed from the region are long/short equity funds, a mere 43% of new funds launched in the region in 2013 had a long/short equity core strategy.

Going forward, the performance of long/short equity strategies managed by Asia-Pacific-based hedge funds is likely to be underpinned by macro conditions globally, and the onus will be on the fund managers to prove that they can adapt to the rapidly changing macro environment in order to ensure that the highly popular strategy remains an attractive investment proposition for investors.

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