Take note Asia, hedge funds look to a comeback

The closures fostered the assumption that hedge funds were dead or dying, but the 170 delegates at the Hong Kong conference beg to differ. "Robertson and Soros and what they did were just a small part of the hedge fund universe," Barry Seeman, New York-based managing director of AXA Global Structured Products, the hedge fund arm of insurance group AXA, told Reuters.

Seeman said the big bet, macro-style funds faced structural problems, but focused, sector-specific plays were making money. Seeman’s operation is 30 months old, has $250 million under management – much of it from AXA’s $789 billion asset pool – and says some of the best investment plays lie in Asia.

"Money is pouring back into this region. More and more of what you are going to see is funds being set up to specifically invest here – maybe with an arbitrage style, distressed funds – there are huge opportunities here in these markets," he said.

The increasing sophistication of Asian financial institutions and their demand for asset diversification as well as geographic spread, was also a driver of growth, Seeman said.

REGULATORS STILL SCEPTICAL: But sceptical regional regulators could halt that shift as they devise new rules to defend markets against hedge funds. Some regulators blame much of Asia’s 1997 financial crisis on hedge fund speculation, an allegation made most vocally by Malaysia’s Prime Minister, Mahathir Mohamad.

The hedge funds say Asia’s equity markets are more exposed to speculation by insider dealing and the proprietary trading activities of big financial institutions. And they say lax rules on bank lending – which can let banks get massively over-leveraged – pose bigger problems to the region’s financial systems.

Asia’s best defence may lie in the fact that shorting stocks, a central strut of hedging strategy, is prohibited in many markets and that equity markets are simply not liquid enough to enable hedge funds to move in and out as fast as they need to.

The biggest obstacle to regulating hedge fund operations in Asia though, is that most are domiciled offshore. "You cannot directly regulate something that is not based on your patch," Alan Ewins, a partner in law firm, Allen and Overy, told conference delegates. "There is no regulatory over-reach to get at a Cayman Islands hedge fund."