Brutal period for Asian hedge fund

Asia's hedge fund industry, one of the world's worst performers even before the latest surge in volatility, will see a major shake-out as the global financial turmoil shuts down a huge number of managers.

While the worst global financial crisis since the Great Depression was caused mainly by problems with the U.S. housing markets and investment banks, Asian hedge funds have actually done much worse than their U.S. and European peers.

Analysts said part of the reason for Asia's poor performance is that a larger proportion of managers use an equity-focused long/short strategy in which they mostly buy stocks they hope will rise, with a small proportion of short bets. U.S. managers are more likely to use complex and sometimes highly levered strategies like convertible bond arbitrage and trading volatility using options. Short selling has traditionally been more difficult in Asia, partly because less liquid markets make it more expensive and risky. So Asia-focused funds are often long-biased, collecting hefty fees in rising markets but offering little downside protection.

However, there should be no blow-ups, as Asian managers generally don't use much leverage.
In terms of size, funds with $500 million or more would be in a better position to survive on management fees alone. But just 10 percent of Asia-Pacific hedge funds manage $500 million or more.

The Asian hedge fund industry has been too hot for a couple of years, now it’s the time to lose some of the more entrepreneurial players that have come in at the margin.