Asian Hedge Funds Steam Ahead, Despite Q2 Losses

Hedge funds focusing on Asian investments experienced heavy losses in the second quarter,

but that did not seem to deter investors from giving them more money.

So what’s going on?

Asian-focused hedge funds lost $2.4 billion in the second quarter as stock indexes in the region fell sharply, Hedge Fund Research reports.

Yet it appears that changes in China’s monetary policy during the quarter attracted some investors

Hedge funds focusing on Asian investments experienced heavy losses in the second quarter,

but that did not seem to deter investors from giving them more money.

So what’s going on?

Asian-focused hedge funds lost $2.4 billion in the second quarter as stock indexes in the region fell sharply, Hedge Fund Research reports.

Yet it appears that changes in China’s monetary policy during the quarter attracted some investors

hoping to benefit from a possible strengthening in that country’s currency against the dollar.

The European sovereign debt problems added to market nervousness,

but Asia had its own problems as China announced that it would not grow as fast as it previously thought.

Indeed, some Asian fund strategies did far worse than their non-Asian counterparts.

For example, funds focusing on relative value arbitrage experienced losses of $2.6 billion as a result of poor performance,

in contrast to similar funds around the world, which saw an increase of $1.1 billion, according to data from Hedge Fund Research.

But this poor performance was contrasted by a $360 million increase in new net assets for Asian hedge funds, according to the data.

This new money came toward the end of the quarter after China announced that it would gradually allow its currency, the yuan, also known as the renminbi, to appreciate against the dollar.

“The fund managers that we speak to that invest in these hedge funds say that they are thematically looking for ways that they can participate in the currency markets in China,”

Kenneth J. Heinz, president of Hedge Fund Research, said.

“They are investing under the pretext that this change in China will create more opportunity for managers focused on this area.”

Those opportunities could include currency trading and convertible debt arbitrage.

For example, American investors who buy Chinese assets today would make a higher return on their investment

if the yuan appreciates, all else being equal, than they would if the yuan stayed pegged to a weaker dollar.

But a stronger yuan could also hurt some parts of the Chinese economy.

Chinese exporters, for example, could see their stock prices tumble if a stronger yuan hurts their earnings power.

The Chinese government said it would gradually loosen restrictions on its currency,

so it could take years to see any major changes in the yuan’s value, according to this story in the New York Times.

China could reverse its position at any time and keep the weak peg to the dollar.

But investors seem to think that it is worth the gamble,

especially given the region’s strong growth rate, compared with that of the rest of the world.

“I think it is very unclear to many investors what the impact of this policy shift will be,” Mr. Heinz said.

“They just want exposure to this theme of participating in Asian / Chinese growth,

which will be dominating global capital markets.”