A rough year for Asian hedge funds in 2011 exposed the long-only bias of many managers' portfolios, leaving the industry fighting a tough battle to retain clients as assets shrink and fund closures accelerate.
The setback puts at risk the industry's slow recovery since 2008 and highlights the need for the survivors to reinvent themselves in Asia, where lower market turnover makes some of the trading strategies used by hedge funds in the United States and Europe harder to replicate.
Net outflows in each of the last four months of 2011 have pushed the industry $52 billion behind its peak assets of $176 billion hit in December 2007, data from industry tracker Eurekahedge showed, spelling troubles for start-ups, prime brokers and other service providers who had pinned hopes on a potential expansion.
Well-known funds such as $300 million Thaddeus Capital and more-than-a-decade-old Boyer Allan Investment Management, which once managed $1.8 billion, have shuttered as the number of closures surged past launches for the first time since 2008.
Months ahead are likely to see more closures 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 "high water mark", or their peak net asset values above which they can charge performance fees.
"It reflects a turning point for the industry," said Aradhna Dayal, head of Asia at industry tracker HedgeFund Intelligence.
"Barriers to entry are the highest ever, the road to closures is steep and slippery, and business sustainability is a key concern," said Dayal, who estimated 67 Asia focused hedge funds closed in 2011 versus 58 launches.
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Hedge funds typically charge 2% management fees and 20 percent performance fees, largely on the promise that they will produce positive returns during upturns and downturns.
But a correlation of monthly returns of Eurekahedge's Asian hedge fund index and the MSCI Asia index in the last three years ending 2011 stood at 0.92, suggesting managers were unable to extract much bang for their investors' buck.