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Asia Pacific L/S hedge funds lead the pack in 2020: a Citywire study

With the market dislocations catching out many investors over the past 10 months, which areas of the alternative world have prospered?

Asia Pacific L/S hedge funds lead the pack in 2020: a Citywire study

LONDON: Equity long/short hedge funds have done well in a difficult 2020, but it is those focused on Asia that have shone brightest.

As a whole Asian countries have dealt better with the pandemic than their European or American counterparts. This has resulted in strong equity market returns, with the Chinese, South Korean and Taiwanese indexes all among the top performing markets in 2020.

Long/short hedge funds investing in the region have also benefited from this and produced strong returns throughout the pandemic.

Data provided by Aurum Research, highlights that in the year to the end of October, the average Asia Pacific long/short hedge fund has delivered gains of 11.3%. Data from the group’s Hedge Fund Data Engine also reveals that those numbers rise further to 17.3% when the returns are asset weighted.

Both of those figures compare favourably with indices in the region, with the broad MSCI AC Asia Pacific excluding Japan index rising just 5.5% in dollar terms over the same time frame.

Source: Aurum Research/Morningstar. Fund performance is until 31.10.2020 in USD and net of fees.

While those gains are shy of the 22.8% made by the MSCI China index – which has been fuelled by the sustained boom in its tech stocks – China is comfortably the best performing market in the region, with the China linked Taiwan market coming in second with gains of 16.8%.

Not only have the returns been strong, but the maximum monthly drawdowns have also been impressive, with the average hedge fund falling by 6.6% during the peak of the pandemic in the first quarter. This is better even than the MSCI China, which gave up 10.2%, and significantly better than the MSCI AC Asia Pacific excluding Japan index, which fell by 21%.

 

Source: Aurum Research/Morningstar. Fund performance is until 31.10.2020 in USD and net of fees.

David Goldin, a senior analyst at Aurum Research, attributes some of the strong returns to a general long bias in Asian markets, in part due to a lack of shorting options in developing markets.

Speaking to Citywire, Goldin said: ‘Most long/short equity funds run net long and this tends to be even more the case for Asia-focused funds, given the difficulties with shorting in more emerging markets.’

Goldin added that there was also a benefit to the long-bias of many of these funds. ‘Asia-focused funds should have had a tailwind this year compared with US, European, and other EM counterparts, benefitting from the strength of Asian markets.’

Goldin also feels that these Asia-focused managers tend to be more directional and ride momentum more than their peers in Europe and the US.

As the pandemic has accelerated the trends that have driven markets for a number of years - namely of a move towards a more technology dependant society - then Goldin believes they have been well placed to take advantage of the region’s resilience.

‘With the momentum factor having performed strongly for most of the year and indeed for the last several years, this is also likely to have suited the style of many Asia-focused funds.’

Indeed the disparity in returns is stark between other long/short sub-sectors, with European long/short losing -0.2% and US long/short gaining 5.2% in the year to the end of October. Interestingly those returns reverse on an asset weighted basis, with European long/short rising 5.4% versus a 2.1% gain in the US.

Whichever way you slice it, this is by no means a poor showing for long/short funds when compared to broad benchmarks – particularly in Europe - with the MSCI Europe down 13.6% and the S&P 500 climbing 2.8% over the same time frame.

Source: Aurum Research/Morningstar. Fund performance is until 31.10.2020 in USD and net of fees.

The momentum bias though appears to be paying off as gains this year have put Asia Pacific long/short hedge funds ahead of their European and even US counterparts over the longer term.

Over the past five years, hedge funds focused on Asia have generated returns of 38.6%, compared to meagre 11.1% for European and a more respectable 33% for US funds. However, given the unparalleled strength of the underlying US market over this time, that is a surprising result.

Despite the higher returns these gains have not come with added volatility, with the annualised standard deviation in Asia Pacific hedge funds standing at 6.7%, versus 5% in European and 7.6% in the US over the past five years.

Source: Aurum’s proprietary Hedge Fund Data Engine database containing data on over 4,000 hedge funds, representing in excess of $2.9tn of assets as of June 2020. Data as at 26 November 2020. Information in the database is derived from multiple sources including Aurum’s own research, regulatory filings, public registers and other database providers. See the following links for more details:

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