For those investing into Asia's hedge funds last year, smaller was better.
The region's largest hedge funds - those managing more than $500 million - delivered weaker returns on average than nimbler, small to medium-sized funds, according to fund research and people with knowledge of the individual funds.
In a year when several Asian stock markets rallied, many bigger hedge funds failed to beat benchmark returns.
Blue chip funds such as Ortus Capital Management and Senrigan Capital lost money, while high-profile launches Azentus Capital and Dymon Asia ended the year barely in the black, said people familiar with their returns. Smaller hedge funds such as Factorial and the Splendid Asia macro hedge fund, however, made their investors richer.
"The industry's dirty little secret is that institutions' need for scale leads them to invest in organisations and funds that are actually too big to be safe," said Peter Douglas, founder of Singapore-based hedge fund consultancy GFIA.
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The numbers for last year will feed a cynical view that hedge fund managers who raise a lot of money get rich from the management fee, regardless of performance. Most hedge and private equity funds keep a fifth of their profits and charge a 2 percent fee on the money they raise - so the more capital coming in from investors, the bigger the fee.
But managers of the smaller funds in Asia realize that if the bigger funds stumble, the entire industry will be affected. While some money meant for large funds will be diverted to smaller, better-return funds in the region, others will opt instead to send their money to the United States and Europe.
Asia hedge funds returned an average 9.8 percent in 2012 as measured by the Eurekahedge Asian index - little more than half the 18.6 percent gain on the MSCI's broadest index of Asia-Pacific shares outside Japan. JP Morgan's EMBI Global index, which constitutes dollar bonds issued by emerging market sovereigns, gained 15 percent.
Most home-grown Asia hedge funds managing more than $500 million each fared worse than that, underscoring GFIA research's premise that good performance becomes less likely when a fund exceeds $500 million.
Ortus Capital, which manages $2.5 billion, saw its hedge fund lose 17.3 percent in 2012, its worst annual return since launching a decade ago. It fell more than 6 percent in December when the yen weakened as the Bank of Japan increased its asset purchase program. "The dramatic move produced our biggest loss contributing nearly 80 percent of the losses for the month," Ortus, one of Asia's biggest hedge funds, wrote to clients.
Senrigan Capital, an Asia-focused fund backed by Blackstone Group, lost 11.5 percent last year, while Azentus Capital, a hedge fund set up by former Goldman Sachs trader Morgan Sze and which once managed $2 billion, gained just about 1 percent, an improvement on the 6.8 percent loss it had in 2011.
The $2.5 billion Dymon Asia Macro Fund, run by former Citadel fund manager Danny Yong, also gained about 1 percent, said people with direct knowledge of the fund's return, down from a 20 percent gain in 2011.
For comparison, an investment just in 1-year US treasuries would have earned 1.3 percent last year.
Risk Versus Return
The returns from top funds are feeding a perception among investors that Asian hedge funds don't provide the results to match the risk that investors associate with the region.
As the numbers come under scrutiny, Asian names producing single digit returns may face the axe as investors can achieve similar or better returns in developed capital markets where there is relatively less risk and far more consistent liquidity.
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The bigger hedge funds in Asia find it tougher in less liquid markets to make big enough bets to have a significant impact on the portfolio. The search for returns can often lead to trades outside a fund's core competency or deals pushed by investment banks - increasing the risk of losses.
But for prime brokers and service providers, the funds earn tens of millions of dollars in fees. Those in charge of allocating money at large pensions and endowments tend to send money to larger funds because their size implies reliability.
"Most of the alpha is found in mid-cap managers, which in Asia is $50 million to $250 million and where we invest most of our capital," said Gottex Fund Management co-founder Max Gottschalk, whose Asian fund of hedge funds returned 18.4 percent in 2012.
Former Credit Suisse trader Charlie Chan's $105 million Splendid Asia macro hedge fund lived up to its name, gaining 63 percent last year betting on real estate investment trusts, bonds and currencies. And Factorial Master Fund, launched by ex-DKR Oasis bookrunner Barun Agarwal in January last year, advanced 23 percent, according to a person with direct knowledge of the fund.
The fund, which made money each month, manages less than $50 million.
Fortress Asia Macro Fund, which increased its assets to $500 million by the year-end, gained 21 percent, said a spokesman for the global money manager.
There are signs that some investors are starting to switch.
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Titan Advisors, which manages about $3 billion for pension funds and wealthy individuals, has shifted some money it invests with around two dozen hedge funds from larger funds to smaller funds.
"If we had another 10 Asia long shorts with between 300 and 600 bucks each and no larger, then that would be more beneficial to the Asian hedge fund industry than 10 underperforming billion dollar funds," said a prime broker who asked not to be named as he didn't want to jeopardize client relations.