THE world's fastest economic growth isn't helping Asia's hedge funds.

The Eurekahedge Asian index, tracking 395 hedge funds, returned 1.6 percent this year through August, the worst performer among regions and about half the 3.2 percent gain by the global benchmark.

Funds have been hampered by a concentration on Asian equities, which have been driven more by Europe's debt crisis and China's slowdown than by company fundamentals such as earnings. The MSCI Asia Pacific Index has climbed 8.2 percent in 2012, compared with the 13 percent gain by the MSCI World Index.

"Most Asian funds have been focused on the equity space and that hasn't done well," said Dhawal Mehta, head of India equity investments at Reliance Asset Management (Singapore) Pte. "In the US and Europe, you have more variety in terms of the kind of funds."

Investors have withdrawn US$447 million this year from Asian hedge funds, while 73 of them have closed in 2012, according to Eurekahedge Pte, a Singapore-based data provider. Seventy-seven percent of the funds in the region are equity-related, versus 46 percent globally, according to Chicago-based Hedge Fund Research Inc.

The Eurekahedge index tracking Asian funds dropped 8.3 percent in 2011, its second-worst year on record, after 2008. The Asian index has underperformed global peers since 2009, when it had a record annual return, Eurekahedge data show.

"The key problem that most hedge funds have had over the past couple of years is that they have spent too much time trying to guess the macro direction of the markets and less time trying to find out what stocks are going to deliver earnings," said London-based Richard Cardiff, who manages the US$380 million CC Asia Absolute Return Fund.

This year has been more difficult for managers who invest in equities based on fundamentals such as earnings because quality stocks haven't done as well as cyclical ones that are more sensitive to economic moves, Cardiff said, declining to name the stocks.

The fund, run by Coupland Cardiff Asset Management LLP in the UK, is down 3 percent this year.

Managers also are struggling to meet investor demand for stricter regulatory and risk-management compliance. The often smaller asset base of Asian funds makes it harder to absorb the costs of such infrastructure.

'A rock and a hard place'

"Managers are caught between a rock and a hard place as investors want the Asian story, but with developed-market levels of risk management," said Peter Douglas, principal of Singapore-based GFIA Pte, which advises investors seeking to allocate money to hedge funds.

Asian hedge funds managed US$125.4 billion as of August, compared with US$358.8 billion in Europe and US$1.2 trillion in North America, according to Eurekahedge.

"Many Asian hedge funds remain equity focused and long biased, making them more exposed to equity market volatility," said Fred Ingham, London-based Asia head of hedge fund investments at Neuberger Berman Group LLC's alternative-assets division. "A lack of hedging tools relative to the West, coupled with a tendency to try to capture market upside, has meant that Asian hedge funds have struggled in difficult global and regional equity markets."

A Eurekahedge global index that tracks long-short equity funds that bet on rising and falling stock prices has gained 2.8 percent this year through August. The similar index for Asian funds advanced 1.1 percent in the period.

The International Monetary Fund lowered its 2013 global growth forecast to 3.9 percent in July from 4.1 percent in April on Europe's debt crisis and slower expansion in emerging markets. Developing Asian nations are projected to grow 7.1 percent in 2012, while China is forecast to expand 8 percent and Japan 2.4 percent, according to the IMF.

Among funds investing in equities, Senrigan Capital Group Ltd, the US$620 million Asia-focused event-driven fund backed by Blackstone Group LP, lost about 16 percent through August, a person with knowledge of the information said, asking not to be identified because the information is private. Nick Taylor, Senrigan's chief investment officer, declined to comment.

QAM Asian Equities Fund declined 19.4 percent through August as stock-market moves have been driven by macro-economic and political news related to the debt cycle rather than company fundamentals, said Frank Holle, the Kuala Lumpur-based co-founder of Quant Asset Management Pte.

High correlation

The fund invests in undervalued stocks with the strongest positive earnings revisions and shorts MSCI index futures based on its own systematic computer models, according to Holle. In a short sale, a manager borrows stocks and sells them, betting they can be bought back later at a cheaper price.

"Volatility has come down a lot in the past years but correlation is still pretty high," Holle said. "This basically means that individual stocks perform generally in line with the markets. This is driven by the fact that macro-economic and political news play a big role in the current markets."

QAM started to fold the Asian equities fund with about US$6 million of assets at the end of last month into its US$29 million QAM Global Equities Fund Ltd, Holle said.

"With the smaller assets under management in the Asian fund, it seemed more efficient for our investors to transfer them to the global fund," he added.

Volatile commodity markets have also roiled funds in Asia.

AN Commodity Fund, which invests in energy, metals and agricultural derivatives traded on exchanges, fell 6.5 percent this year through September 12, said Tan Tien Leong, the chief investment officer of Singapore-based AN Capital Pte.

"Being a commodity hedge fund, the reason why you're in the space is because you believe in a long-term growth story so you tend to be more directionally bullish than bearish," Tan said. "Since early 2011, a lot of exogenous shocks occurred outside of our analytical framework which affected psychology and fund performance."

Decisions to buy wheat and corn as their prices declined contributed to the fund's performance, said Tan, a former fund manager at Millennium Capital Partners LP.

Redemptions by risk-averse investors forced commodity hedge funds to sell out of positions to return cash, also affecting performance, Tan said. AN Commodity Fund has shrunk to about US$2.6 million from its peak of about US$41 million in November 2010, in part because of redemptions, said the experienced investor.