By Jeffrey Hodgson -Analysis HONG KONG (Reuters) - Asian hedge fund managers will likely close down or be bought out in growing numbers this year in a painful bout of consolidation triggered by financial market turmoil.
Combined with tougher barriers for potential start ups, the number of Asian hedge funds could actually shrink in the near term, putting a still-growing pool of investor cash in the pockets of larger, established players, industry executives told the Reuters Hedge Funds and Private Equity Summit this week.
"Investors are demanding more of managers in regards to operational infrastructure, compliance, risk management ... you have to have a critical mass of assets under management to be able to pay for all of that," said Eugene Kim, chief investment officer of $250 million hedge fund manager Tribridge Investment Partners.
"A lot of marginal managers who have not been able to make it to the next level in terms of fundraising, in terms of size, are either going to have to merge or get bought out or shut down."
Asia-Pacific focused hedge funds, which had about $156 billion in assets at the end of February according to hedge fund tracker Eurekahedge, are among the industry's worst performers globally since the start of this year.
After producing five straight years of double-digit percentage gains, the Eurekahedge Asian Hedge Fund Index is down 7.26 percent this year. This compares with declines of 1.53 percent and 3.49 percent respectively in its North American and European indexes.
Ferenc Sanderson, senior research analyst with Reuters-owned fund information supplier Lipper, predicted the hedge fund attrition rate in Asia would be more than twice the global average of about 8 percent.
He said many fund of hedge fund managers and wealthy individuals had already started pulling their cash out of falling Asia-focused funds.
"The bloodletting is in full swing," he said.
NO REGION FOR YOUNG FUNDS
Asian hedge funds were hit hard by tumbling stocks, partly because equity-focused long/short funds are overrepresented compared to more developed markets.
While these funds are supposed to profit in both rising and falling markets because they can sell stocks short, in many cases they are long-biased, preferring to buy and hold shares.
MSCI's measure of Asian stocks outside Japan .MIAPJ0000PUS dropped more than 14 percent in the first three months of 2008, its worst quarterly performance in more than five years.
Hedge funds globally have also seen their ability to borrow money from their prime brokers tighten amid a global credit squeeze spurred by the U.S. subprime mortgage meltdown. Many of the brokers' own parent banks are facing huge credit problems of their own.
Many hedge funds use leverage in a bid to boost returns, though Asian funds are less reliant on that on average than U.S. and European managers.
"In a year or two years from now, we'll see more dollars in Asian hedge funds. Dollars allocated will grow. But I think we'll see consolidation. There will be a lot of guys that will shut," said George Long, chairman of $1.5 billion hedge fund manager LIM Advisors. Continued...
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