Asian hedge funds regain lost ground in May, increasing leverage

Asian equity-focused hedge funds rebounded in May, recouping April losses driven by tariff concerns and reaching a year-to-date high of 6.1%, according to Goldman Sachs data. The recovery, fueled by easing U.S.-China trade tensions, saw China-focused funds gain 1.3% and Japan-focused funds rise 0.8% in May, though performance lagged the broader MSCI Asia-Pacific Index. Despite increased risk appetite reflected in higher net exposure, analysts anticipate greater return dispersion among Asian hedge funds due to varied positioning during the volatile period.

Analysis

Asian equity-focused hedge funds demonstrated a significant recovery in May, with fundamental long-short strategies posting a 1.6% gain, effectively erasing April's tariff-induced losses and returning year-to-date performance to the first-quarter high of 6.1% as of May 22, according to Goldman Sachs. This rebound was largely attributed to a broad market rally following a U.S.-China agreement to temporarily reduce tariffs, which also contributed to a moderately positive market sentiment. Specifically, China-focused fundamental managers saw returns of 1.3% in May, while Japan-focused peers gained 0.8%. However, this recovery lagged the broader MSCI Asia-Pacific Index, which advanced over 4% during the same period, a consequence of many funds having aggressively reduced positions during the heightened volatility of early April. The V-shaped market recovery proved challenging for some managers, leading to expectations of increased performance dispersion among Asian hedge funds, particularly those trading Japanese equities, as noted by Sussex Partners. Despite lingering tariff and geopolitical uncertainties, there is evidence of renewed risk appetite, with net exposure among Asian equity hedge funds increasing to 50.8% by May 22 from 46% at the end of April, indicating a cautious optimism among managers.

Key Decisions for Investors

• Investors should acknowledge the positive May rebound in Asian hedge fund performance but remain cognizant of their underperformance relative to broad market benchmarks during this recovery phase, suggesting a need to evaluate individual fund alpha generation.
• Given the anticipated increase in return dispersion, particularly among Japan-focused funds and due to varied positioning during recent volatility, rigorous due diligence and manager-specific analysis are critical for allocators.
• Monitor the increased net exposure in Asian equity hedge funds as an indicator of managers' evolving risk appetite, weighing this against the backdrop of persistent geopolitical and trade-related uncertainties that could reintroduce volatility.