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Growing pains: Asian hedge funds

06 March 2017

Despite volatile returns over the last 12 months most observers expect Asian hedge funds to perform well and attract new capital in 2017, despite strong competition from private equity. Paul Golden reports

HFR’s November 2016 Asian markets hedge fund industry report found that total capital invested in Asian hedge funds increased to $111.8bn in the third quarter of last year, recovering the decline from the previous three months but remaining below the record high of $119.8bn reached in 2014.

Chinese hedge funds posted strong gains as the Shanghai Composite Index pared 2016 losses and the renminbi stabilised, while hedge funds focused on investing in Japan also produced positive returns as the yen posted intra-uarter gains against the US dollar and year-to-date losses on the Nikkei 225 were pulled back.

 Asian hedge funds navigated intense regional equity and currency market volatility in 2016. With the macroeconomic and political overhang of both the US election and Brexit now removed, and as global M&A activity continues to accelerate, HFR president Ken Heinz expects specialised Asian hedge fund strategies to attract global and institutional investors in 2017.

 "Interest in quantitative hedge funds in Asia has continued to expand, but they have been popular with Asian investors for some time and while Asian equity markets clearly declined in early 2016, there is no evidence of a causal relationship," he says.

  Quantitative strategies

According to Eurekahedge analyst Mohammad Hassan, this trend is a reflection of quantitative strategies being able to identify, process and step into potentially lucrative trades ahead of the crowd. "Systematic strategies with exposure to commodity futures have the added benefit of low correlations to traditional equity market focused strategies. While there has been gravitation towards quant strategies globally, there is a real worry that perhaps there are too many copycat strategies out there crowding out trades."

Growing interest in quantitative hedge funds in Asia is perhaps an indication of a potential longterm trend towards computer-driven strategies. Peter Douglas, Singapore-based principal of the Chartered Alternative Investment Analyst (CAIA) Association suggests that it is more about the rapid development of super-fast computing power, the development of tools to extract information from big data and the potential of machine learning.

"Any successful alpha strategy must, by definition, be doing something different from the mainstream and what we are seeing is a race to stay ahead of the technological curve," he says. "It should also be noted that any computerdriven strategy is only as good as the minds that conceived and built it. The industry still needs the smarts to make this work."

Philippe Ferreira, senior cross asset strategist at Lyxor Asset Management, says growing interest in quantitative hedge funds in Asia reflects a rebalancing between discretionary and systematic strategies. "Systematic strategies are attractive for portfolio diversification purposes, yet some long/short equity managers have faced more difficulties in reducing risk and protecting capital recently. Hence part of that growing interest in quantitative hedge funds in Asia is related to diversification purposes and the ability of quantitative strategies to have lower correlation to traditional markets. Disappointing equity returns have also played a role, though."

Foresee Global Asset Management (HK) partner and CEO, Tom Weiye Tang, says this has remained a theme. "Disappointing equity returns in 2016, especially in China, have driven money towards computer-driven strategies. The average performance of Chinese quantitative funds easily beat that of the long-biased funds last year and more and more investors are turning to quant strategies for stable and low risk returns in times of increasing uncertainty."

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