HONG KONG - Asian hedge funds delivered their strongest returns in 15 years last year, capitalising on market volatility, winners in China's wobbly economy and opportunities in artificial intelligence (AI).

The HFRI Asia with Japan Index, which tracks hedge funds that mainly invest in the region, rose 12.1% last year - its best annual growth since 2009.

HFR is one of the largest global hedge fund data platforms. 2024 was a volatile year for most investors amid capital flows from the region into stronger dollar assets, deflation risks in China, and a massive unwind in yen-funded carry trades.

While hedge funds navigated last year's turbulence, investors expect trading in Asia to remain challenging in 2025 amid geopolitical uncertainty and Donald Trump's second U.S. presidency.

Many China-focused funds beat the benchmark China indexes by picking the winners in the country's economic transformation, sources within the funds and investors told Reuters.

Hong Kong-based Keywise Capital, which manages $2 billion, saw its flagship Mega Trend strategy rise 51% in 2024, thanks to its bets on Gen Z consumption such as retailer Miniso and power supply companies such as China Yangtze Power , which benefited from AI demand.

Keywise's tech-focused Penguin development fund book a 71% return. Fang Zheng, chief investment officer of Keywise, said AI, businesses that appeal to younger consumers, and clean energy would be key sustainable trends and he expected "AI will address human emotional intelligence (EQ) applications extensively in 2025."

First Beijing, a China-focused hedge fund, gained 42% last year, lifted by its stakes in Meituan, Atour Lifestyle and Full Truck Alliance, according to a source familiar with the performance.

Funds that seized the brief window of opportunity after China announced its stimulus package in September had decent returns, according to Timothy Moe, chief Asia Pacific regional equity strategist at Goldman Sachs.

"It's very clear that hedge funds have been very nimble and quick to exploit the rallies in China," Moe said, noting that such funds scaled up their positions in China on the back of the stimulus rally, and reduced them when the market peaked in early October.

Fundamental long-short funds in Asia posted an average gain of 14.1%, higher than their peers in the U.S. and Europe, which were up 13.2% and 4.6% respectively, according to estimates by Goldman Sachs prime brokerage.

Asia-based multi strategy funds also had a good year with Dymon Asia, Pinpoint and Ovata Capital delivering double digit returns. Singularity Tech Fund, run by Hong Kong's $1.3 billion CloudAlpha Capital Management, jumped more than 70% last year, with positions in semiconductors and datacentre infrastructure generating profitable returns, according to the company.

Panview Capital’s flagship pan-Asia fund jumped 41% in 2024 helped by its large bets in Japan, according to an investor source. Panview and First Beijing did not respond to a Reuters request for comments.

Analysts say China remains a difficult market for global allocators, regardless of last year's impressive returns. "We see more interest in either Asian multi-strategy funds or Japanese funds as these are seen as operating in a more predictable regulatory and political environment," said Patrick Ghali, managing partner of Sussex Partners.

(Reporting by Summer Zhen; Editing by Vidya Ranganathan and Kate Mayberry)