HONG KONG – Asian equity-focused hedge funds staged a robust recovery in May, clawing back losses suffered in April and pushing their year-to-date returns back to Q1 highs. According to data compiled by Goldman Sachs, a rally in regional equities, fueled by an easing of tariff tensions between the United States and China, has helped these funds return to growth despite earlier market volatility.
Highlights:
Asian long-short equity hedge funds gained 1.6% in May.
Year-to-date returns now match Q1 highs at 6.1%.
Easing U.S.-China tariffs boosted broad-based stock market gains.
Regional Equity Markets Surge on Tariff Relief
The May rebound in Asian hedge fund performance was driven by a notable recovery in regional equity markets, bolstered by the U.S.-China agreement to temporarily cut tariffs. This policy shift lifted investor sentiment across Asia and triggered a strong rally in equities, aiding hedge funds that were able to recalibrate positions effectively after April’s steep losses.
The MSCI Asia-Pacific Index advanced over 4% this month, significantly outperforming the gains seen in many actively managed funds. Although hedge funds posted positive returns, many trailed behind the benchmark due to defensive positioning earlier in the month.
Highlights:
MSCI Asia-Pacific Index climbed more than 4% in May.
Many funds underperformed the benchmark due to cautious positioning.
The U.S.-China tariff détente improved investor sentiment across Asia.
Performance by Market: China and Japan Show Modest Upside
By geography, China-focused fundamental long-short hedge funds posted a 1.3% gain in May, while their Japan-focused counterparts rose 0.8%, Goldman Sachs estimates show. The more modest recovery relative to broader indices highlights the lingering cautious sentiment and the challenges managers face in high-volatility environments.
Japan-focused funds, in particular, have seen heightened dispersion in performance due to increased volatility and divergent trading strategies. Goldman Sachs observed that funds trading Japanese equities exhibited some of the widest variances in returns, reflecting differing interpretations of macroeconomic conditions and policy signals from the Bank of Japan.
Highlights:
China-focused hedge funds gained 1.3% in May.
Japan-focused funds increased 0.8% but showed high dispersion.
Funds trading Japanese equities experienced wide return variability.
Leverage and Risk Appetite Increase Despite Lingering Volatility
Goldman Sachs also noted a significant rise in net exposure among Asian equity hedge funds, climbing to 50.8% as of May 22 from 46% at the end of April. This increase reflects a growing willingness to reintroduce risk into portfolios as equity markets stabilize and trade policy tensions temporarily subside.
Despite remaining geopolitical uncertainties, the rising exposure levels suggest that managers are increasingly confident in short-term market resilience. This marks a reversal from April, when funds aggressively trimmed positions to mitigate losses amid extreme volatility and rapidly shifting global trade narratives.
Highlights:
Net exposure rose to 50.8% from 46% in April.
Hedge funds are showing renewed risk appetite despite ongoing uncertainty.
Increased leverage signals confidence in short-term equity market momentum.
Divergence in Hedge Fund Returns Points to Strategy Dispersion
While average performance metrics indicate recovery, individual hedge fund returns have varied widely depending on strategy, positioning, and market timing. According to Patrick Ghali, managing partner at Sussex Partners, the rapid V-shaped market recovery proved difficult to navigate for some funds that had already reduced exposure during April’s sell-off.
Ghali emphasized that the disparity in outcomes among funds will likely continue to widen as volatility remains elevated and as global macroeconomic developments remain unpredictable. This suggests that manager selection and strategy differentiation will play an increasingly critical role in performance going forward.
Highlights:
Wide return dispersion emerged due to different positioning and timing.
The V-shaped recovery was difficult for funds that cut risk early.
Strategic differentiation will become increasingly important in volatile markets.
