HONG KONG (Reuters) - Smaller-sized hedge funds are increasingly throwing in the towel in Asia as they struggle to attract money from risk-wary institutional investors, casting a cloud over prospects of the $128 billion industry.
The latest to quit is former Lehman Brothers trader Allan Bedwick, who is shutting his $120 million Asia-based fund after giving it a two-and-half-year run, fund documents obtained by Reuters showed.
Hong Kong-based Bedwick's global macro strategy fund is Asia's newest hedge fund victim of the global economic woes as fears of a worsening euro zone debt crisis, and slowing growth drive investors toward the safety of large and well-established funds. Nearly 40 hedge funds in Asia have shut this year.
Bedwick made money for his investors but could not attract enough capital, a problem that raises a question mark on similar plans of other traders who are eyeing moving out of bank proprietary desks to start their own ventures.
"The truth is, you should not start a hedge fund unless you can get a scale relatively quickly," said Richard Johnston, head in Asia of London-incorporated Albourne Partners which provides consultancy on hedge funds.
"Scale means starting over a $100 million and quickly getting to half a billion and if you can't do that, it's going to be a tough task," he added.
A shrinking industry spells troubles for start-ups, prime brokers and other service providers who had pinned hopes on a potential expansion.
The top-5 prime brokers, for example, lost 90 clients between them in the year through April and their collective assets under management fell by $11.5 billion to about $90 billion, according to a survey released in May by industry tracker AsiaHedge.
The Asian hedge funds industry never fully recovered from shocks in 2008 and 2009, when more than $40 billion left regional hedge funds and nearly 300 funds shut down, data from industry tracker Eurekahedge showed.
Its assets are now about $50 billion below the $176 billion peak hit in December 2007.
Historically, smaller hedge funds in the region relied heavily on money from local and European fund-of-funds. A large part of that money has not returned since the 2008 financial crisis and has been replaced by investments from institutions such as pension funds and endowments.
But these large investors have avoided smaller managers as they can't take in big-ticket investments and are particularly cautious about whom they invest within these turbulent markets.
And while the institutional money has powered the growth of bigger Asian managers such as Singapore-based Dymon Asia and Hong Kong-based Senrigan, the lack of it has made many smaller managers give up their plans to continue their own firms.
More closures of small hedge funds are likely in the months ahead as investors punish underperformers and fund managers reassess future plans after four tough years.
Eurekahedge estimates nearly seven in every 10 Asia funds are below their 'high water mark', or their peak net asset values above which they can charge performance fees.
Correlations between asset classes from commodities to equities had started to break down earlier this year, opening the way for funds to play asset classes against each other as hedges or outright bets.
But risk assets have started moving in lockstep with each other again and that is threatening to undo what was looking like a benign environment for macro and long/short funds.
After a positive two months at the start of 2012, regional hedge funds, as measured by the Eurekahedge Asia index, have lost money in the last three months.
This year's closures include Novatera Capital, which managed about $90 million in a long/short hedge fund, and Orvent Asset which shut its $130 million event-driven hedge fund after its Swedish seed capital investor pulled out at the end of April.
TIG Advisors also liquidated its 15-year-old, $210 million global emerging markets hedge fund earlier this year.
Doric Capital, one of Hong Kong's oldest hedge fund firms founded by former Man Group Plc executive Michael Nock, and Thaddeus Capital Management also shut hedge funds recently.
The Sequence Fundamental Macro Fund, earlier known as OGI Global Macro Fund that Bedwick started in October 2009 in Japan, is currently returning capital to investors and will shut by the end of June, according to a letter to investors seen by Reuters.
Bedwick declined to comment.
Macro hedge funds focus on major economic trends and events and bet anywhere they see value, including stocks, bonds, currencies, commodities and derivatives markets.
Bedwick's fund gained 0.1 percent in the first three months of 2012 versus a 1.9 percent gain in the Eurekahedge global macro hedge fund index. The fund reported a 3.1 percent gain in 2011, outperforming a 1.2 percent drop in the index.
The fund executive headed global macro trading at Lehman Brothers and later at Nomura Holdings after the Japanese company bought Lehman's Asia and European businesses.
(Additional reporting by Vikram Subhedar; Editing by Muralikumar Anantharaman)