Asian Hedge Funds in a Risk-on, Risk-off World

We analyze the performance of Asia-focused and Asia-based funds in risk-on and risk-off periods between 2002 and 2011. We find that Asian hedge funds, like their US and European counterparts, deliver equity-like payoffs with bond-like risk. They generate returns that are roughly in line with the equity markets in risk-on and neutral states of the world. While their returns do not dominate those of US Treasuries in risk-off situations, they generally outperform the equity market by a significant margin. Indeed, their risk-adjusted returns in riskoff states are on par if not higher than their risk-adjusted returns in risk-on states. Of course, this is cold comfort for investors who would have preferred a larger allocation to US Treasuries in such situations. Nonetheless, hedge fund investors who are principally concerned with performance in a risk-off environment will benefit from an increased allocation to CTAs and macro hedge funds in Asia. Investor in such funds over our sample period would have harvested on average positive returns even in risk-off conditions. The trade off is that they would not have benefitted more from the stellar risk-on returns of equity long/short and event driven funds.