Should Hedge Funds Hedge Against Asia?

Date: Thursday, December 8, 2011
Author: Geoffrey Rogow, The Wall Street Journal

A piece of advice for all the hedge funds flocking to Asia: think twice when investing here.

According to data just released by Chicago-based Hedge Fund Research, hedge fund investments in Asia ex-Japan posted the worst year-to-date performance in 2011, dropping nearly 16%. Energy and basic materials are the second worst performer at a drop of 13.6%.

The returns come as the last few months have brought hedge fund magnates from Angelo Gordon, Maverick Capital’s Lee Ainslie and Daniel Och of Och-Ziff Capital Management all to the Eastern Hemisphere. In Australia, they’re driven by a US$1.4 trillion compulsory pension pool, called superannuation. For Asia, the hedge fund industry’s push east stems from the fact that while the traditional U.S. and European investor base treads carefully with an industry that at one point put Bernie Madoff on a pedestal, robust economic growth in Asia is leading to a new wealthy on the hunt for smart money managers.

“About three to four months ago, a lot of the Asian equity markets corrected quite savagely,” said Annette Beacher, head of Asia-Pacific research at TD Securities. “We went from this strong impression Asia would be the growth leaders to people taking money out of Asia because they weren’t expected it to be immune from Europe. A lot of money come off the table in Asia.”

Coming east is nothing new for hedge funds. George Soros famously made a killing in this part of the world on a series of currency bets in the late 1990s. But the latest push appears to be about capital, not strategy, with a plan from former Lone Pine and Goldman Sachs executives to raise $1 billion in an Asia-focused hedge fund, according to Reuters, just the latest development.

As for where to invest, Hedge Fund Research’s private issue index was the biggest gainer so far this year, up 8.6%. It’s worth keeping in mind that even that barely beat the Barclays Capital government and credit bond index, up 7.8% on year.