The full version of the following story and of one published online last week appeared in the April 2010 edition of AsianInvestor magazine. Paid subscribers can access this and other magazine stories here. For subscription enquiries, please contact our subscriptions team or call +852 2122 5222.

For the first time in few years we can look at Asia's long/short hedge funds and feel optimistic. The average Asian long/short hedge fund was up 26% in 2009, which is this sector's best performance since 2003. It follows a -20% fall for the average long/short fund during 2008.

But hold the bouquets. Equity markets were up in 2009 by 40% plus. So a hedge-fund investor did not lose as much as the long-only funds in 2008, but she didn't benefit as much from the same upside in 2009. Hedge funds for the most part did not swing to long bias around March 2009, the low-point of the markets.

This was particularly true of those managers that had managed to get through a dire 2008 in decent shape: they had survived because they had resisted putting on long positions too early and getting burned. That conservatism meant, however, that they didn't call the bottom.

"We had been flat in 2009 after having been slightly positive in 2008," says Kevin Yip, CEO of Sun Partners Investment Management in Hong Kong, which runs the Sun China Fund, an equity-focused long/short fund covering Greater China stocks. "In 2009 the timing of the rally was unexpected and was pricing in things that we hadn't expected to see for several more months. Our net exposure was up to 50% by the end of the year."

The focus for 2010 is not calling inflection points in the market but getting back to fundamental research. "People are more focused on long-term value, bottom-up valuations and corporate business models," says Yip.

Missing the turn
It's a bit unfair to lambast managers for being slow to go long. No one was complaining about funds that actually preserved capital in 2008, and most investors are better off having kept their assets relatively intact rather than rely on a good 2009 to compensate for 2008's losses.

These managers may not be able to point to a great 2009, but there are other ways to measure performance. "Last year we were very conservatively allocated," says Alan Landau of Marco Polo Asset Management. "On a risk-adjusted basis we were the best performing [China hedge fund], with a Sharpe ratio of 0.86."

However, there were a handful of equity hedge managers that did call ...

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