Seven straight months of outflows this year have resulted in Asia-focused hedge funds losing 10% of their assets in the year to end-July, according to data provider eVestment.
That’s a far bigger slump than any other segment of the industry globally, and it’s due largely to poor performance but also negative sentiment on the region and particularly China, said Peter Laurelli, global head of research at eVestment.
Asia-focused strategies lost $740 million last month, meaning $12.05 billion of their assets had been withdrawn in 2016 as of July 31, reducing total AUM to $99.87 billion. Admittedly, however, that is the smallest monthly outflow from Asia funds this year (the biggest coming in March, at $2.67 billion), which could suggest redemptions are slowing.
Asia strategies have returned just +0.66% this year to July, according to eVestment, while China funds are down -4.29% after a particularly bad January, when they lost -10.27% on the back of the mainland stock-market plunge.
Emerging-market funds have also seen net outflows year-to-date – of $2.87 billion – but that is a relatively small proportion of their total AUM of $272.84 billion.
Laurelli puts the Asia outflows down to poor returns in mid-2015 and the first quarter of 2016 in particular, driven by China equity volatility. The trend was exacerbated by negative sentiment on China, as was shown by the fact that even some of the few mainland-focused strategies with positive returns this year have seen net outflows year-to-date, he told AsianInvestor.
The large redemptions have also come despite the fact that Asia funds performed positively last year, returning +4.62%, said Laurelli. “The shift from positive to negative flows had been more rapid than in pretty much any other [hedge fund industry] segment,” he added, "although overall industry outflows have accelerated more broadly in the last two months."
Negative flows have come pretty much across the board, noted Laurelli, although a few pockets of strategies operating in Asia have prospered this year. He cited systematic currency and financial derivatives funds, which have posted both positive performance and inflows.
They averaged returns of +12.80% this year, he noted, but added that this was a small sample of fewer than 10 products and that flows had been dominated by even fewer products. Laurelli declined to provide the flow data.
Europe a brighter spot
Interestingly, Europe strategies have actually bucked the hedge fund trend in the year to July by attracting $5.89 billion of inflows, raising their overall AUM to $252.04 billion. That said, they saw outflows last month of $660 million and over the three months to end-July of $4.71 billion.
Europe funds’ overall success this year is related to the higher proportion of big systematic strategies in that region, said Laurelli. They performed well in the second half of 2014, spurring positive sentiment that lasted into early 2016, but have faltered early this year, he noted. So while these strategies did relatively well in the aftermath of Britain’s vote to exit the EU, he added, they are now starting to suffer redemption pressure.
Hedge funds will be hoping to see a turnaround in their fortunes, but Northern Trust forecast this month that they are set to underperform most other asset classes in the coming five years.
Meanwhile, industry observers have suggested that Asian institutions are set to increase their allocations to the asset class. That would be a welcome boost for this embattled sector.