Despite poor first-half returns, Asia-focused hedge funds saw net inflows of close to $400 million in the second quarter, following outflows in the first quarter. Chicago-based Hedge Fund Research (HFR) puts the inflow figure at $360 million, while Singapore’s Eurekahedge cites $390 million.

HFR says one reason for the rebound was that investors were anticipating moves by China to boost the flexibility of its currency policy. Eurekahedge analyst Farhan Mumtaz agrees, although he also cites several other factors.

A number of managers had been positioned for June's de-pegging of the renminbi against the dollar, and the expectation is that it will appreciate further in the second half of 2010, says Mumtaz. 

“The move is being interpreted as a sign that the Chinese government has a positive view of the domestic market, hence allowing for the currency to get stronger,” he adds. “In light of this, investors are expected to add more Chinese assets to their portfolios in the coming months, and as such we predict further inflows into the region.”

Other reasons Mumtaz cites for Asia hedge-fund inflows include: the performance of Indian hedge funds (the Eurekahedge India Hedge Fund Index is up 4% year-to-date -- the highest return across all regions globally); renewed interest in Japanese hedge funds; and strong launch activity in the region.

Meanwhile, others feel the relaxing of renminbi controls will be less of a factor in the near-term.

“Many funds in the region and globally had been positioned for RMB revaluation for some time prior to the government’s announcement, and it has been a consensus theme,” says Frederick Ingham, head of hedge-fund investments for Asia at Neuberger Berman in Hong Kong.

“After the announcement, I haven’t seen a material rise in expectations of near-term RMB appreciation, rather a belief that we will see a gradual rise over a number of years,” he says.

Still, Ingham says there are certain areas hedge funds have been thinking about in relation to renminbi flexibility (other than outright currency moves). They include: the effect on the competitiveness of exporters/importers, the containment of inflationary forces in onshore China, and the impact of revaluing the assets of non-RMB-denominated companies with RMB-denominated assets -- for example, certain Hong Kong-listed property plays. 

Moreover, rising levels of corporate activity -- in terms of both intra-regional deals and Western acquisitions by Asian companies -- have attracted capital to event-driven hedge funds in the region, adds Ingham. 

Other factors behind the Asian hedge-fund second-quarter inflows, he says, include inefficiencies in the fast-growing Asian capital markets providing different sources of alpha than in the West; and continued improvement in the quality and experience of the Asian hedge-fund universe.

Finally, he also cites the faster economic development in many of the healthier Asian economies as a draw for foreign capital, particularly as many players were underweight Asia in their alternatives portfolios coming into the year.