Asian hedge funds posted their largest gains of the year in November, with a 3.03% gain overall, and a 3-month return of 4.71%. In fact, the gains were the best since mid-2003. The charge was led by the ex-Japan region, which gained 3.93% for November, and emerging markets, which added to this year's excellent returns with their best monthly performance since early 2001. Conversely, a 5% drop in Japanese equities for the month slowed the Eurekahedge Japan Index to a 0.5% gain. Japan's sluggishness reflects poor economic data and a slower-than-expected recovery. In general, most of the gains in the last three months were from currency appreciation due to the declining dollar. Asia's emerging markets continue to be the hot sector and the favourite global play is still long Asian currencies versus a short dollar.

Distressed debt funds performed the best over the last three months, returning 5.69% through November. These returns have been largely attributed to the dollar's weakness, which has resulted in tightened credit spreads for high yield issues, thus benefiting distressed debt funds. As with most strategies, Asia Pacific distressed debt still sees low volumes on a global scale, and thus offers systematic inefficiencies that will generate consistent returns. Event-driven funds, which often capitalise on the same opportunities as distressed debt such as capital restructurings, also continued their pace for the year, up 5.55% for the last three months. The highest deal volume in the US since early 2000 is only the most salient trend of increased global corporate activity. Event-driven funds have generally benefited from increased public offerings, secondary placements and block trades in the region.

Directional strategies such as macro and equity long/short, which have had difficulty in this year's trendless markets and low volatilities, finally cashed in on some developing big picture patterns. Macro funds returned 4.54% for November on these directional movements. The high returns for the three major US equity indexes in November and the lower dollar allowed managers who were dollar-short to achieve positive returns on both fronts. Long/short equities funds, with a 3.4% gain, were second only to macro funds for November. Similarly, CTAs bounced out of their slump with a 2.87% return for November due to gains from short dollar positions and strong Asian currencies, although the strategy still trails the pack for the year.

Going forward, many Asian portfolios will be looking to capitalise on the Asian currency gains, thus; portfolio volatilities will likely increase due to a lack of hedging against local currency depreciation. In addition, signs point to a continued drop in the dollar, as the fed seems to find depreciation a healthy answer to US trade deficits and Japan's MOF is unlikely to intervene by adding to its dollar reserves or selling yen. Long-term risks aside, US growth prospects will be hampered by this continued decline even if exports do increase because the dollar's reserve currency status is becoming shaky.