After a difficult 2011 where funds experienced returns far below relevant equity indices, the Asian hedge fund industry struggled to maintain their client base and assets under management throughout last year. With an average loss in 2011 of 12 percent, it isn’t hard to see why investors ran to the exits in the following months. But as often is the case in the investing world, the patient few were rewarded and investors saw substantially increased returns in 2012. According to HedgeWeek, the Eurekahedge Asia ex-Japan Hedge Fund Index gained a solid 11.5 percent in 2012. While on its own this return seems respectable, Asian hedge funds still trailed comparative equity indices, with the MSCI Asia ex-Japan posting a 19.4 percent rise. However, the trend is positive for the industry moving into 2013.
Asian Hedge Funds Offer Unique Diversification Opportunity
While returns haven’t quite matched Asian equity indices, hedge funds located in overseas jurisdictions can be especially attractive for North American and European investors. Putting aside possible tax advantages, such funds offer intriguing diversification opportunities. Not only are these hedge funds invested in markets with low correlations to U.S. or European equities, but they are focused on strategies that also often work to lower correlations. A long/short strategy, Asia’s most common hedge fund model, offers a low correlation to equities when compared to traditional asset classes on its own, even before the additional diversification advantage of foreign investment.
Inflows Expected to Improve in 2013
2012 saw a net $500 million leave the Asian hedge fund industry, following the dismal 2011 performance, while their peers in the United States saw inflows of approximately $69 billion by comparison. Overall, total assets under management remain below the 2007 peak of $176 billion and currently sit at $140 billion. That said, the strong 2012 returns should encourage many investors back into Asian hedge funds. Over the past several years, investors have been seeking out assets that offer returns that are not correlated with equities, yet offer higher yields than the fixed income market. As interest rates are expected to be near historical lows for some time, expecting an increase in flows to Asian hedge funds would reasonable, especially now that returns are starting to improve.
Smaller Funds Outperformed Large Funds
Another interesting development in the growth of the Asian hedge fund industry was the outperformance of smaller funds within the region. Most funds with more than $500 million US under management trailed their relative indices, while much of the growth in the industry came from small firms with less than $500 million in investments. This reflects the importance of creativity and agility in the hedge fund industry, especially in emerging markets, which is something a smaller firm is more able to provide.
What Does This Mean for Hedge Fund Job Seekers?
In the coming years, it seems as though Asia will be a key source for new opportunities in the hedge fund industry. If investors return to the region due to a recovery in returns, this should allow firms to bring on additional staff to fill vacancies created in 2012 when many funds saw client dollars drift westward.
The increasing attractiveness of smaller hedge funds to investors certainly opens the door to a number of opportunities as well. Generally, a number of funds require more professionals to service the same assets under management as a large fund. Job seekers can use the inverse of economies of scale to their advantage in the Asian market. As long as agility and adaptability are competitive advantages in Asia, and we would expect that premise to hold for some time, the job market in the Far East will remain an attractive source of opportunities.