Asia Hedge Funds Face Drawdowns, Redemptions

Aug 6 2008 | 8:49am ET

Asia-focused hedge funds have taken a beating this year and investors are shying away from managers who not too long ago were seeing double-digit returns.

Funds investing in India and China produced the worst performance of any specific hedge fund classification after leading all hedge funds for much of 2007, according to

The HFN India and China Averages were down 14.97% and 8.87% in June, respectively, leaving them down 36.88% and 18.77% in the first half of 2008.

Peter Laurelli, vice president of Clear Channel Group, which owns, noted that the issues with China and India do not appear to be part of a broad emerging market risk-aversion sell-off, but rather due to more country specific concerns.

“The performance inversely mirrors the sharp rises both countries’ equity markets experienced in 2007,” he said.

India Unwinds

Boston-based Venus Capital Management’s $100 million Special Situations Fund, an India-focused event-driven arbitrage and special-situation strategy, is down 22.25% in the first half, an about-face plunge from last year’s gain of 35.34%, according to public databases.

In an interview, Vic Mehrotra, founder of Venus Capital, said he is positioning the portfolio for more market declines this year in India, where investors are worried about higher oil prices, inflation and political turmoil. He also said the fund has faced some redemptions from leery investors.

Other U.S.-based India focused hedge funds that have experienced double-digit drawdowns this year include the Monsoon India Inflection Fund (down 41.1% year-to-date, up 102.38% in 2007) and newcomer Vishwas India Fund (down 24.48% YTD, up 29.58% 2007).

A lot of the gains generated by the India funds in the last few years came from sectors like real estate, power and construction, according to Vishwas founder Matt Mongia. “These sectors have seen a painful unwinding, in some cases 50%,” he told FINalternatives.

In the small- and mid-cap arena, Mongia says trading volume and liquidity have dried up to a point where many managers couldn't sell their holdings even if they wanted to. “So many funds have ridden their portfolio names up and all the way back down,” he says.

As long-term value investors, Mongia believes there are very attractive gains still to be had in India.

“In many ways, the price action this year has flushed out a lot of the hot money from global bank prop desks and global macro hedge funds,” he said. “Most FII's who have stuck it out are committed to India and see the same types of opportunities to generate returns over the long-term.”

“India still has many, many growth drivers and is growing at a robust, albeit slightly slower, rate than the last few years. Now we’ll likely see a stock-pickers environment. You won't simply be able to throw darts and expect to make money.” 

Hedge Funds Hit In China, Japan

India hedge funds weren’t the only ones getting knocked around this year. China- and Japan-focused funds also experienced their fair share of losses. According to public databases, Frontpoint’s Japan and Greater China funds are down 12.17% and 2.31% through June, respectively. Martin Currie’s US$156 million Absolute Return Asia Fund is down 9.53%, and the $200 million York Asian Opportunities fund is down 10.14%.

Between June 19 and July 14, Japan’s Nikkei 225 Stock Average fell for 12 consecutive trading days, a streak unmatched since the coronation of a young Queen Elizabeth II in 1953 (Her Majesty is now 82), and one which underlines the doom and gloom mentality of domestic and foreign investors alike, according to Huw Llewellyn, a member of Thames River’s Japan team.

“Because the pessimism is so prevalent, this has resulted in valuations which continue to trade at generation lows,” he wrote in an investor letter.

Investors Pull Back
Investors are also pessimistic about Asian hedge funds, committing just $530 million in new capital in the second quarter, a figure offset by a performance-based decline of nearly $320 million, according to data from Hedge Fund Research. This inflow total represents a drop of nearly 50% from the approximately $1 billion in new assets added to Asian hedge funds in the first quarter.

“Asian hedge fund investors reacted to continuing market volatility by adjusting allocations opportunistically to those regional markets that had posted sharp year-to-date losses,” said Kenneth Heinz, president of Hedge Fund Research.

“Compared to the rest of the hedge fund landscape, the Asian hedge fund industry has a much higher percentage of equity hedge strategies and lower percentage of macro strategies, the latter of which have posted strong gains through the volatility of 2008. This disparity in strategy composition, which had a positive influence on results for Asian hedge funds for the five-year period ending in 2007, has adversely impacted Asian hedge fund industry performance thus far for 2008.”

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