HONG KONG (Reuters) -Asia hedge funds weathered the March selloff in markets better than their U.S. counterparts, helped by the relative outperformance of Chinese stocks as global investors rushed into that market.

Asia-focused hedge funds posted an average 0.71% loss this month until the 10th, compared with a 2.6% drop for their U.S. peers and a 1.7% drop for global peers, a Morgan Stanley prime brokerage note dated March 12 shows.

While the market rout impacted Asia hedge funds, their year-to-date outperformance relative to the United States has expanded, pointing to how the region is becoming somewhat of a haven for investors fearing a U.S. recession.

"Asian equity long/short, especially single-country managers have been very strong this year," said Nick Silver, head of Asia Pacific prime services at BNP Paribas. "This region feels a little bit insulated from the recent market rout. "

Asian hedge funds that bet on stock rises and falls, tracked by Morgan Stanley, were up 2.8% year-to-date, while the U.S. ones lost 2.6%.

U.S. President Donald Trump's aggressive tariff policies have jolted global markets and triggered a steep sell-off in U.S. stocks.

Global hedge funds rushed to cut risk and losses, causing the largest two-day unwinding of stock positions in four years on March 7 and March 10, according to Goldman Sachs. The tech-loaded Nasdaq plunged 4% on Monday, its biggest single-day percentage drop since September 2022.

In Asia, that unwinding also affected some multi-manager funds trading in Japan, forcing them to unwind their crowded bullish bets on Japanese stocks, according to sources familiar with the matter.

But the casualties were mostly in U.S. investments, they said.

Morgan Stanley estimates that year-to-date hedge fund purchases of Chinese stocks are almost double that in the September 2024 market rally, as losses on Wall Street accelerated investors' capital rotation.

Hong Kong's benchmark Hang Seng Index - where many major Chinese companies are listed - is up about 20% since Trump entered the White House in January. 

Hedge funds are also keen to re-enter the South Korean market once a short-selling ban is lifted on March 31, Morgan Stanley said.

Their positioning in Asia has been extremely light, meaning investors are able to be nimble and have less difficulty in getting out of consensus long positions and crowded shorts, Silver said.

"People have been able to move around a lot quicker here," he said.