How bad was 2011 for Asian hedge funds? Well, hedge funds lost money. Again.

Although it’s hardly news that hedgies have struggled in the face of market volatility, new data from Chicago-based consultancy HFR shows the extent to which supposedly smart money has, in aggregate, failed in the face of tough conditions.

In short, 2011 was a stinker. But there were some pockets of success, and data from the fourth quarter suggests that some strategies are turning the corner.

Every Asia-oriented performance index of HFR’s is negative for the year. The least bad was the Fund Weighted Composite Index, which lost -5.13% in 2011, followed by the Asia with Japan Index, down -5.18%.

Japan was a stabiliser. Last year HFR’s Asia Emerging Markets ex-Japan Index lost -17.75%. Throw in developed Asia markets, and the broader Asia ex-Japan index was down only(!) -13.81%.

It would be nice to write that “at least the hedge funds beat the index”. But they didn’t beat the index. The MSCI AC Asia ex-Japan Index was down -6.4% (year on year as of February 1).

The only thing that really beat the index was Japan. HFR’s Japan index lost -6.8% in 2011, versus the Nikkei 225’s -17.3% collapse.

In fact, Q4 results for Japan were downright balmy, with the hedge-fund index gaining 2.64%, versus +0.25% for the Nikkei 225. Buckle those seat belts.

Investors have not sat still. Assets under management among Asia-focused funds worldwide declined in 2011, from over $83 billion to $82 billion. This is despite net inflows in the first three quarters of the year. Net flows turned negative in Q4 (down about $1 billion). Lousy performance accounts for the rest of the industry’s value destruction. 

To be fair to Asia-focused managers, the story for the rest of the world, in terms of asset flows and new launches, is similar.

But the region’s industry remains hampered by its lack of diversification. Among Asia-focused funds, 76% are equity hedge strategies, versus 46% for the global industry.

That reflects the lack of developed capital markets and a relative lack of experience, but it also suggests that the days in which long/short funds could claim low correlations to broad market indices are over.

There remain, of course, standout success stories for Asian hedge funds. But they are looking like exceptions, not the rule.