SINGAPORE: Hedge fund managers said industry consolidation and increased regulatory oversight with accompanying costs are the top two challenges facing the industry in the next one to two years.
This is according to a pool of 100 hedge fund managers interviewed by accounting firm, Ernst and Young.
Many also pointed to a downward pressure on fees, resulting in a drop in revenues.
Hedge funds are investment funds that generally only open to institutions and sophisticated investors specified by regulators and use advanced investment strategies such as leveraged, long, short and derivative positions.
According to Eurekahedge, an investment funds research house, specialising in hedge fund databases, Asian hedge funds may be delivering an annualised returns of 9 percent since 2008, but things are not looking all that rosy for the industry.
More than 70 hedge funds in Asia have shut down this year, with more expected to close shop next year.
Eurekahedge's head of Analysis and Research, Farhan Mumtaz, said: "Returns are performance-based, so if they are performing well, it does not necessarily mean they would be making a lot of cash for themselves especially if they have a smaller asset base.
"Since 2008, a number of hedge funds remain below their high water mark."
The slowdown in the US and the sovereign debt situation in Europe have made matters worse for hedge funds in Asia as asset flows dried up because of risk aversion.
This year, Asia's hedge funds are estimated to have managed some US$126 billion -- a drop of almost 30 percent from 2007.
But the number of hedge funds operating in Asia remain almost unchanged, standing at 1,319 for the three quarters of 2012, compared to 1,317 for the whole of 2011.
Mr Mumtaz said: "It is a fluid situation, there will obviously new start-ups. We expect that trend to continue for one reason, banks themselves are not doing too well -- their trading operations are at risk of closing. So, when that's closed, to pre-empt that, traders might start their own hedge funds."
However, industry tracker, Eurekahedge expects the asset size of Asian hedge funds to grow 7 percent next year to US$135 billion as risk appetite recovers.
Ernst and Young's partner for Assurance and Financial services, Brian Thung, said: "Investment performance is a very key criteria for the investors.
"However, the investors also need to understand or they want to understand how would the managers be having an operational model that would allow them to create this kind of returns that investors crave for."
According to Ernst and Young, hedge funds continue to face a squeeze on margins, particularly on fees and often in return for large mandates and lock-up periods.
- CNA/lp
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Asian hedge fund industry faces challenges ahead
