Hedge Fund Population May Shrink in Asia

The hedge-fund party may be over in Asia. After years in which the number and assets of Asia-focused hedge funds have steadily risen, prime brokers and hedge fund managers say they expect a larger number of managers to fold up the tent this year–not so much because they are decimated by subprime debt losses, as are some in the U.S. and Europe, but because declining equity returns mean the hedge-fund managers themselves won’t be making much money.

Anecdotally, prime brokers and hedge fund managers say that so far this month the losses are approaching between 4% and 5% of equity in the funds, added to the toll on returns in January and February. Eurekahedge estimates that long/short equity funds are down about 5% year-to-date, but the Singapore-based research firm bases that data on reporting by hedge funds themselves, and the worst-performing of them have little incentive to own up to their pain this month.

Much like mutual funds, long/short hedge funds in Asia generally buy and hold shares. As a result, they are notoriously exposed to market fluctuations. This means that many so-called long/short hedge funds in Asia fail to fulfill their promise to investors: to deliver consistent returns regardless of whether the market goes up or down.

Because most hedge-fund managers agree to forfeit the 20% performance fee they typically charge until losses are made up, prime brokers say, some hedge-fund managers are apt to choose their own demise rather than struggle to make their investors whole.