Research

2018 Key Trends in Asian Hedge Funds

Introduction

The Eurekahedge Asian Hedge Fund Index was down 1.57% year-to-date, and ended up as the only major regional mandate within the Eurekahedge database that was in negative territory over the first seven months of 2018. Asian hedge funds traded under the pressure of the escalating US-China trade war. The United States president Donald Trump officially fired the first shot in the trade war by imposing a 25% tariff to US$34 billion of imported Chinese goods on July 6, 2018 in response to China’s alleged unfair trade practices. The move resulted in China’s retaliatory tariff of the same magnitude on the US agriculture products, which took effect on the same date. After the first tranche of the US and China trade tariffs, the US president proposed another 25% tariff on US$200 billion of imports and further escalated the trade friction between the two largest economies in the world. China’s two mainland stock exchanges continued to slump since the beginning of the year as the impact of the tariff spat began to be felt throughout the markets. Exacerbating the effect, foreign investors fled from the country’s risky assets in anticipation of the undesirable economic impact of the trade war, leading to major selloffs across asset classes. The Shanghai Composite Index and the Shenzhen Composite Index were down by 13.03% and 17.00% respectively as of July 2018 year-to-date, placing themselves as some of the worst performing major stock indices around the globe. In contrast, the Eurekahedge Greater China Long Short Equities Hedge Fund Index was down 2.52% over the first seven months of the year.

As the trade war escalated, the Trump administration also announced a seven-year ban on the ZTE Corporation, one of the leading telecom equipment manufacturer in China, from importing US technologies over a violation of the US sanctions against Iran and North Korea. Immediately following the announcement, the company had to broadcast that they were unable to continue operations. Eventually, the ban was lifted after the company paid a settlement with the US government and agreed to allow inspections of its plants, in a move which could be interpreted as a goodwill gesture towards the Chinese president Xi Jinping.

Figure 1: Industry growth since 1999
 Asian hedge fund industry growth since 1999

Figure 1 provides the industry growth of Asian hedge funds since 2000. As at end-July 2018, the total assets managed by Asian hedge funds stood at US$197.4 billion, while the industry population stood at 1,508 hedge funds. While the number of hedge funds in the region has mostly stagnated between 2014 and 2017, the industry assets grew noticeably over the last two years, owing to the strong performance and investor allocations in 2017, following the weak performance of Asian hedge funds in the preceding year. From the figure above we can also observe that the 2008 financial crisis hit the Asian hedge fund industry particularly hard, and it wasn’t until last year that the industry managed to recover the lost assets and surpass the previous industry AUM peak by the end of 2007.

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