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Key Trends in Asian Hedge Funds (August 2020)

The Eurekahedge Asian Hedge Fund Index was up 0.89% year-to-date as of June 2020, outperforming the underlying equity market as represented by the MSCI AC Asia Pacific IMI, which lost 7.18% over the same period. In 2019, Asian hedge funds registered 9.95% return, supported by the strong performance of the underlying equity market on the back of positive geopolitical development and accommodative central bank policies. Looking into 2020, the mandate suffered significant losses in the first quarter of the year owing to the COVID-19 outbreak, which originated in the province of Wuhan, China. The coronavirus was later declared by the World Health Organization (WHO) as a pandemic. The spread of the virus forced government authorities to impose lockdown that resulted in a temporary closure of non-essential businesses. The partial shutdown of economic activity pushed the unemployment rate higher, causing a global-wide massive sell-off in risk assets in February and March. The CSI 300 and Shanghai Composite recorded 10.02% and 9.83% of losses in the first quarter of 2020. Going into the second quarter of 2020, the spread of the virus decelerates brought to most provinces in China, particularly in Wuhan, to reopen its economy in April. The Shenzhen Composite and CSI 300 recovered its losses and ended the first half of 2020 in positive territory, with 14.66% and 2.14% return, respectively. Asian fund managers were down 9.39% in the first quarter compared to their 11.34% return in the second quarter of 2020.

Amidst the challenges faced by Hong Kong caused by the pandemic, the social unrest in the region escalates as Beijing passed a new security law that undermined the autonomy of the special administrative region from China under the “One Country, Two System” model. The US administration also condemns the newly enacted law in which their congress proposed a new bill that penalises Chinese officials responsible for instituting or enforcing the new security law. The proposed bill resulted in a fresh tension between the US and China after their official signing of “phase one deal” in January 2020. The Hang Seng Index was down 13.35% as of June 2020.

Figure 1: Industry growth since 1999

Figure 1 above provides the industry growth of Asian hedge funds since 2000. As of the end of June 2020, the total assets managed by Asian hedge funds stood at US$178.6 billion, while the industry population stood at 1,455 hedge funds. The number of hedge funds in the region has mostly stagnated between 2014 and 2020, even though the industry assets grew noticeably in 2017. However, the industry’s total assets contracted by US$10.6 billion in 2018. 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 2018 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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