Asia hedge fund losses grow in Q3, poised for worst year since 2008

© Reuters. FILE PHOTO: People walk past a screen displaying the Hang Seng stock index outside Hong Kong Exchanges, in Hong Kong, China July 19, 2022. REUTERS/Lam Yik

By Summer Zhen

HONG KONG (Reuters) - Hedge funds focused on emerging Asia posted their biggest monthly losses in years in September and are set for the worst year since the 2008 financial crisis, data provider HFR said.

The firm's HFRI Asia ex-Japan Index slumped 7.7% in September, the worst single month performance since March 2020, HFR data showed on Oct. 17. Third quarter performance was a negative 10.4%, compared with a 4% drop in the second quarter. 

The extended losses came as Asian markets faced mounting headwinds from hawkish Federal Reserve rate hikes, uncertainties surrounding the once-in-five-years China's Communist Party Congress, and rising Sino-China tensions over Taiwan and tech.

"It's a very painful third quarter for (Asia) hedge fund managers' performance. The managers are monitoring the 20th Party Congress to have some clarity on China-related investments," said Benjamin Low, senior investment director of Cambridge Associates.

The week-long congress, which started on Sunday, is expected to detail China's policy objectives and see current leader Xi Jinping reelected for a precedent-breaking third term.

The HFRI index plummeted 22.8% in the first nine months, the largest performance drawdown since the 2008 financial crisis when the index fell 26.4% for the same period, according to Reuters calculation based on HFR's data.

China managers led the losses in September, with HFRI's China Index dropping 8.5%, alongside a sell-off in equity markets. Repeated lockdowns in many Chinese cities, a risk-off mode ahead of the party congress and geopolitical risks affected market sentiment.

Hong Kong's Hang Seng Index hit an 11-year low in September and tumbled 13.7% for the month, the Shanghai Composite Index fell 5.5%, while MSCI China's index declined 9.7%.

Other Asia emerging equity markets such as Taiwan and South Korea, which are sensitive to inflation, were also down more than 10% in September.

The equity long/short strategy was the worst performing, while market neutral and multi-strategy managers had the best performance in September and so far this year, BofA Securities said in a note.

The magnitude of central bank policy moves and frequent macro headlines created profitable trading opportunities for macro hedge funds globally, analysts said.

"We think macro funds will continue to do well in the next 6-12 months," Low said.

The HFRI Asia ex-Japan Index tracks funds that target more than 50% of their investments in the Asia ex-Japan region. Japan-focused hedge funds fared relatively well, with the HFRI Asia index that includes Japan, down just 3.3% in September and 3.9% this year.