Asia’s Stockpickers Struggle in Banner Year for Large Hedge Funds – Reuters

By Summer Zhen and Xie Yu

HONG KONG (Reuters) – Hedge funds in Asia are poised to experience their worst performance in 12 years, as long-short equity strategies struggle amidst volatility in China, while macro funds benefiting from significant global interest rate changes excel.

In China, the easing of strict COVID-19 restrictions is juxtaposed with the unpredictable consequences of the government’s focus on reducing economic inequality and President Xi Jinping’s tightening grip on power, placing pressure on fund managers with substantial investments in Chinese stocks.

The broader market in Asia remains weak, with the MSCI benchmark for China down around 27% by the end of November, while the Asia ex-Japan index dropped nearly 20%.

On average, Asian hedge funds have performed better than these indices, recording a loss of 9.1% through the end of November, according to data from Eurekahedge. Should this trend persist, it would mark the poorest annual performance since 2008. Specifically, Asia equity long-short funds experienced a 12% loss, Greater China long-short funds lost 14%, while Asia macro funds gained 12%, and multi-strategy funds saw a 1% increase.

The challenges of stock selection this year have been starkly evident, with lingering effects anticipated into 2023. "The problem is that the market hasn’t given much weight to fundamentals lately," explained Patrick Ghali, managing partner at Sussex Partners. "It’s uncertain when fundamentals will regain importance, and until then, traders may fare better than managers focused on fundamental analysis."

PERFORMANCE DECLINES

High-performing funds have faced setbacks due to a combination of rising global interest rates, regulatory scrutiny, and uncertainties surrounding China’s alignment of capitalism with its economic goals. Popular growth stocks, including those in the electric vehicle, e-commerce, and internet sectors, have seen significant declines.

Aspex Management, which had achieved impressive gains of 54%, 96%, and 30% in its first three years since inception in 2019, has hit challenges, with its $7.4 billion equity long-short fund down 9.8% for the 11 months to November. This fund’s long positions, comprising major holdings like Alibaba and Sea, suffered around 40% in losses.

Similarly, FengHe Group’s flagship FengHe Asia Fund lost 5% over the same period after a robust 27% gain in 2022. Zeal Asset Management’s $148 million long-biased fund also saw a decline of 31% as of December 2 but maintains an optimistic outlook for the Chinese equity market in 2023.

SHIFTING STRATEGIES

A shift towards caution regarding China and a retreat from the technology sector have benefited some investors. Wong Kok Hoi, CIO at APS Asset Management, noted that the era of investing in concept or meme stocks is over. APS’s offshore All China Long Short Fund declined 17%, while its onshore China long-only fund rose 8% in yuan terms through November.

In contrast, Tairen Capital, an equity long-short fund based in Hong Kong, reported a 15% return this year, primarily due to bets against tech stocks. Its assets under management grew from $5 billion to nearly $6 billion since March 2022.

Macro funds, which capitalize on economic and political dynamics, have performed well amid U.S.-China tensions and rising interest rates. The flagship macro fund from Asia Genesis Asset Management in Singapore rose 15% in the first 11 months, largely from shorts on U.S. and Japanese stocks, alongside successful long positions in U.S. government bonds.

"Our agile trading strategy has seen success," commented Chief Investment Officer Soon Hock Chua, who anticipates continued volatility in the year ahead. "While swinging range markets may pose challenges for many, they present opportunities for active managers like us."