Asia hedge fund recovery set to stall as market slide bites

Mon Sep 26, 2011 11:48pm EDT

* Asian industry remains $47 bln below peak assets of $192 bln

* Market slump to hit returns, delay fund launches in 2011

* Hedge fund executives starting to delay marketing trips

* Inflows seen muted; many funds face capacity constraints

By Nishant Kumar

HONG KONG, Sept 27 (Reuters) - Asia's hedge funds industry is seen struggling to regain its pre-crisis size any time soon as the recent global market slump threatens to deter investors from making fresh allocations to them and delay new product launches.

That is bad news for the dozens of startups, prime brokers and service providers who have set up shop or expanded in Asia in the hope of capital returning to the region.

Regional hedge fund assets contracted 5 percent in the first half of 2011 to $145 billion, $47 billion below the peak level hit in December 2007, as defensive portfolios clipped returns and investors started applying the brakes to capital re-allocations, new data released by industry tracker AsiaHedge on Monday showed.

By contrast, the global industry regained its pre-crisis asset levels last year and subsequently scaled new highs of above $2 trillion, according to data from Hedge Fund Research.

Even though total assets of Asia-focused hedge funds are probably higher -- with many large funds not disclosing their assets to data providers -- industry insiders say assets remain well below peak levels.

"Given the mess the world appears to be in, I just don't see risk appetite returning this year," said Peter Douglas, founder of Singapore-based hedge fund consultancy GFIA Pte.

Capital flows into regional funds started to tick up from mid-2009 with investors favouring funds such as Blackstone backed Senrigan, Dymon Asia Capital and Macquarie Asian Alpha Fund, boosting their assets above $1 billion this year.

However, a global stock markets slump on worries about the health of the U.S. economy and the European sovereign debt crisis is seen making investors wait for the dust to settle down before making new allocations to the region.

A 20 percent drop in Asian shares since August has wiped out the entire performance gains of regional hedge funds for the year, as measured by the Eurekahedge Asia index. And the outlook for returns for the rest of the year remains blurred.

"I don't see how we can see a massive amount of inflows in the rest of the year," said James Fallon, director, financing sales in Asia Pacific, at Bank of America Corp .

"Performance is tough to come by so it might be tough to regain the all-time highs," Singapore-based Fallon said.

CANCELLED MARKETING TRIPS

Typically, the second half of the year is also when hedge fund launches tend to slow down in Asia.

New launches in the second half of the year have attracted significantly less capital than the first half in four of the last five calendar years, according to data from AsiaHedge.

While the market for startups has not been frozen in Asia and seed capital, or day-one capital, is still available as some investors continue to back managers with pedigree and track record, scaling up is a struggle for most.

"There's going to be delays," said Julius Wang, managing director at Samena Capital, which provides seed capital.

"The number of people who are starting funds right now is much lower than we were seeing earlier in the year."

Already, fund executives have started delaying trips to market their products in the United States and Europe.

"We are seeing some clients re-assess, and in some cases, delay marketing trips to Europe and the US given current market conditions," said Martin Visairas, Asia Pacific head of sales and capital introduction at Citigroup .

"For some funds, performance has been challenging, and investors have widely adopted a wait-and-see approach, preferring to focus on understanding the impact of current market conditions to their existing allocations over making new investments," the Hong Kong-based executive added.

CAPACITY CONSTRAINTS

Unlike 2008, when Asian hedge funds suffered major outflows, industry insiders say redemptions are normal and some managers continue to receive inflows.

Asia funds attracted a net inflow for the 16th consecutive month in August, increasing their total inflows for 2011 to $7 billion, as investors shrugged off volatile markets and raised bets on the region's fast growth.

"I have a feeling that that's (inflows) going to slow down dramatically now and, should redemption start coming in given what's going on in the markets, I would suspect that. But as of yet we haven't seen that," Fallon of Bank of America said.

There's also capacity constraints as hedge funds tend to manage far less money than traditional long-only funds and shut doors to new investors fearing higher assets would hurt performance. For many hedge funds in Asia, $1 billion starts to raise an alarm.

Many of the large funds managed by well-known fund managers and with performance track records, such as Prime Capital's $1.7 billion Greater China long short equity fund, Senrigan and the $2 billion Azentus, run by former Goldman Sachs star trader Morgan Sze, have already closed to new investors. (Editing by Muralikumar Anantharaman)