After growing at an exponential pace for nearly five years, the Asian hedge fund industry suffered massive redemptions coupled with significant losses, owing to tumbling equity markets in 2008, bringing its size down from its peak of US$176 billion as at end-2007 to US$107 billion as at end-July 2009. Although the current level of assets is no different from that seen around the end of 2005, it represents a remarkable 24% compounded annualised growth rate since end-2000, compared to a 16% annualised growth rate for the global hedge fund industry.

Figure 1: Growth of the Asian Hedge Fund Industry

The compounded growth rate of the fund population also stands at 24% despite only a 6% decline in the number of funds since end-2007, while assets over the same period shrank by nearly 20%. This is mainly because:

1. The Asian hedge fund industry saw strong inflows of capital (US$43 billion) coupled with impressive capital gains (US$37billion) between end-2005 and end-2007 which drove up the assets significantly, while the number of funds grew at a relatively modest rate.
2. Similarly, Asian managers faced worrisome levels of redemptions in 2008 and early-2009 (US$47 billion up to April 2009), while the number of funds fell at a relatively modest rate as the majority of the managers were able to remain afloat, given their strong earnings during the pre-2008 years.
3. Relatively lower operating costs for funds based in Asia as compared to those based in the US or Europe made it easier for managers to remain operational.

Asian hedge funds saw net inflows through both July and August, suggesting that the bulk of the redemptions are over. Investors, who missed out on gains during the recent market upturn and are looking for consistent long-term returns from the Asian markets, going forward, are turning towards hedge fund managers who have historically captured most of the upside in the markets and protected capital relatively reasonably well on the downside (as shown in Figure 8). We expect...

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