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Asian hedge fund industry veteran Peter Douglas, founder and principal of GFIA, has been covering Asian hedge funds since 1998. Over the years since then the 18 editions of his semi-annual Asian hedge fund note have reported on the industry as it has seen it grow, achieve critical mass and then contract back again to what he now deems a period where an overall stagnant picture masks structural change.

Back in 1998, Douglas says, the industry was small and participants mostly knew each other. It was dominated by ‘maverick' specialists and it wouldn't achieve critical mass, both in terms of size and number of managers until the early years of the next century. "In those early stages, the industry was still characterized by investment specialists rather than financial entrepreneurs. Capacity was relatively easy to access even in top performing managers" Douglas writes.

It was in 2003/4 that global allocators began to research Asian hedge funds, research that was quickly followed by allocations as Asian hedge funds appeared to perform differently from those based in the rest of the world. However, concentration was still focussed on high profile managers.

In 2005, GFIA counted 136 hedge funds with more than US$200m under management and by the end of 2007, Asiahedge reported 35 hedge funds with over US$1bn of hedged assets run from Asia.

The financial crisis hit the Asian hedge fund industry hard with 2008 producing what Douglas calls ‘a maelstrom' of redemptions. "The subprime crisis in the US developed into a global liquidity squeeze, leading to widespread redemptions. Allocations, regardless of whether tactical in nature or not, were retracted quicker than they were made. Performance was no protection against redemption. Larger funds were hit harder than most, and many firms' AUM were more than halved. Funds running more liquid strategies (of which Asia had a larger proportion) were easy targets for "ATM-effect" redemptions, and experienced greater outflows than (generally much larger) illiquid funds. The number of fund closures spiked and several global firms exited the region" Douglas writes.

The following years saw some resumption of inflows as the hedge fund industry in Asia stabilised but attrition rates, the number of funds closing as a percentage of the total stuck at 11%. Post financial crisis and post Madoff, Douglas reports that there was increasing pressure on Asian hedge funds to institutionalize their operational infrastructure and, at least nominally, improve transparency.

2010's changes saw proprietary trading desks spun off from investment banks as they attempted to de-risk, new management firms started up with new funds and opened offices in Hong Kong/Singapore, cementing Asia's position as one of the global financial hubs for the hedge fund industry.

However, 2011 and 2012 continued to see new capital largely flowing into larger funds, despite what Douglas believes is the empirically weaker performance and generally lesser transparency. "GFIA estimates that as at end-2011, there were approximately 30 managers (10 indigenous firms and 20 global managers) with over US$1bn of hedged Asian assets, compared with 55 at end-June 2011. GFIA's research suggests that the fall was a result of overall net outflows of capital from the region during 2H 2011, as well as a continuing trend of decreasing transparency from larger managers.

We counted 12 purely Asian focused managers with over a billion AUM as of June 2012; they however represent less than the total sum of hedged assets in Asia, since we discounted funds with a broad global or emerging markets mandate. However, as of June 2012, the total AUM of the industry was an estimated US$138bn, compared with US$147bn at end 2011. The industry shrank for the first time ever in 2011 and is continuing to downsize as we speak".

In an interview with Asia Pacific Intelligence, Douglas said that one of the few bright spots are the long-only stockpickers, who although are of course not hedge funds, often appeal to a similar universe of alpha-seeking allocators.

"There's clearly institutional interest in a small number of large managers in Asia" Douglas said. "The hedge fund proposition makes little sense these days, unless you are a backwards looking institution using 10-year data to make your decisions, and need to invest in organisations and funds that, frankly, are too big to be safe. The skill sits in small principal owned organisations that are doing everything right, but are hanging onto their assets by the skin of their teeth."