Asia's hedge-fund industry is on the upswing, attracting more money this year than in any year since the global financial crisis and beating returns in the U.S. and Europe.
Net inflows of $14.4 billion in the nine months ended Sept. 30 brought total assets under management in Asia to $140.8 billion, according to data provider Eurekahedge Pte. Ltd. Asia's hedge-fund industry, while still small compared with those of North America and Europe, is closer to the peak of $176 billion reached in 2007 than it has been in the last five years, a reflection of rising confidence in the region's hedge-fund managers and of economic growth in Asia that remains far stronger than the rest of the world.
Japan-focused funds have been the standout performers, returning 21.2% in the first nine months, according to Eurekahedge, as Prime Minister Shinzo Abe has enacted aggressive stimulus measures to pull the economy out of two decades of deflation and stagnant growth. Funds that invest in China returned 11.5% as the economy kept up a fast growth clip, despite some slowing. Performance elsewhere has been patchy, with India funds returning a loss of 11.2% and South Korea a loss of 1.4%.
Overall, the region delivered a 10.1% return in the first nine months, beating Europe's 5.0% and North America's 6.3%. Since the financial crisis, Asian hedge funds have outperformed European funds by 13.7%, although they have underperformed North American funds by 11.0%, according to Eurekahedge. The fat returns have led Swiss fund-of-hedge-funds manager Gottex Fund Management Holdings Ltd. GFMN.EB -2.68% to partner with Hong Kong-based fund of funds Headland Strategic Ltd., which is run by two former executives from Blackstone Group LP and Goldman Sachs Group Inc., to raise up to $900 million to invest in new hedge funds.
Headland plans to give individual Asian hedge funds up to $100 million to start up. "Investors have been so focused on their various crises at home since 2008 that there's been a lack of resources dedicated to Asian hedge funds," says Max Gottschalk, co-founder of Gottex. He prefers investing in small funds in their early years because they take more risks that can generate higher returns than larger funds with more conservative institutional investors. In addition to partnering with Headland, Gottex bought Penjing Asset Management, a Hong Kong-based fund of funds with $434 million of assets under management, in May 2012. Mr. Gottschalk said Penjing will help the Swiss firm increase its investments in Japan- and China-focused hedge funds. Gottex is increasingly looking at the Chinese market, where fund managers will likely be able to profit from an improving domestic stock market, he said. Asia's hedge-fund industry has had a bumpy ride the past few years, with heavy redemptions and poor performance during the global financial crisis and a slow recovery since then.
More than 100 hedge funds in the region have gone out of business each year since 2007, with the industry growing by only $2.7 billion to $126.4 billion last year, according to Eurekahedge. Asia remains dominated by small funds that have less than $100 million under management. The size of Asia's hedge-fund industry remains small compared with other parts of the world. North American hedge funds manage $1.3 trillion of assets, while European hedge funds manage $414.7 billion. Assets under management at North American hedge funds have bounced back since the financial crisis, while fund totals in Europe and Asia have been slower to recover.
As fund managers beef up their presence in Asia, investors are favoring pan-Asia funds as opposed to those focused solely on one country, a way to limit risks in any one market. Still, there is heavy interest in China. Plus, there is growing interest in funds focused on bonds and event-driven strategies, not just on stocks, the traditional favorite. "Global investors are more willing to take risks, and performance of Asian hedge funds has been particularly strong the last 12 months," said Farhan A. Mumtaz, a senior analyst with Eurekahedge. "A few large funds are increasingly attracting assets at the expense of smaller hedge funds because institutional investors have become more stringent with their criteria, including increased focus on funds that have a longer track record, can return money faster and manage risk better."
By Chao Deng at WSJ