UPDATE 1-It's D-Day for hedge funds as redemptions roll in

(Recasts, adds quote, details on redemptions)

By Svea Herbst-Bayliss and Jeffrey Hodgson

BOSTON/HONG KONG, Sept 30 (Reuters) - Hedge fund managers are facing D-day as investors demand back billions of dollars from ailing and healthy funds alike.

Funds managers around the world said they are sitting on record levels of cash to meet an expected flood of "I want my money back" notices on Sept. 30 -- the end of another month of horrible industry performance and the deadline for most funds offering monthly and quarterly redemptions.

"This is not like flicking a light switch," said Timothy Mungovan, a partner who advises hedge funds at law firm Nixon Peabody LLP. "It is more like a bowling ball careening down an alley where we don't know if it will go down the gutter or be a strike and take out several big funds."

The issue goes beyond well-paid hedge fund managers losing lucrative asset management fees: Global markets could be jolted if hedge funds are forced to dump stocks, bonds and other securities to meet redemptions.

Even industry stars such as Kenneth Griffin of Citadel Investment Group are nursing losses and the average hedge fund is down roughly 10 percent so far this year -- the worst performance in more than a decade.

September was especially brutal, with the average fund losing roughly 5 percent, Hedge Fund Research (HFR) data show. And funds specializing in Asia ex-Japan are hardest hit: They were already down almost a fifth by the end of August, HFR data show.

Some managers said they will have to conduct fire sales to return money to pension funds, endowments and wealthy clients, who put in so much money that industry assets doubled to $1.9 trillion in three years.

Others are prepared. Merrill Lynch said in a research note on Sept. 29 that hedge funds have been cutting leverage and held a record cash balance of $184 billion in August.

Some fund managers will likely put up restrictions, including so-called gate provisions, to keep investors from leaving a fund all at once, investors and lawyers warned.

Asian funds are especially vulnerable given steeper losses than their U.S. and European counterparts and the flight to safety by big global investors.

"The European and Japanese investors, in tough times, always take away money from the periphery ... Many will leave the region, many will leave emerging markets," said Jim Walker, managing director of Asianomics, an economics consultancy.

They are not alone in racing for the exits at hundreds of the world's roughly 10,000 loosely regulated funds that long wooed clients with promises of strong returns in all markets. In return, managers routinely keep clients' money for months, if not years, and often require 45 days notice to get it back. That is happening now.

"The perception is that people need cash and that they will ask for their money back even from hedge funds that are doing well," said Laurel FitzPatrick, a partner in charge of the hedge fund practice at law firm Ropes & Gray.

Redemption is the talk of the industry, even overshadowing griping about worldwide bans on short-selling that have paralyzed common trading strategies such as arbitrage.