"The Asian hedge fund industry has all the hallmarks of a teenager," says Rob Appleby, co-founder of ADM Capital, one of Asia's longer-lived hedge funds. "From the outside it looks extraordinarily ugly, but it works."
His remark is meant humorously, but in one way, he is dead right: the Asian hedge fund industry is beginning to grow up. Truly Asia-based funds, with $140 billion of assets under management, still make up just 7 percent of the global industry's total, but some managers are maturing, as are investors' attitudes toward them.
There are now between 15 and 20 funds in the region with upwards of $1 billion in assets under management – and the professionalism with which these larger funds are being managed and operated means they cannot be described as grubby adolescents.
Mr Appleby, whose credit-focused funds have about $1.8 billion under management, says that 2008 was a cleansing period for the industry after too many had spent too long taking unhedged bets on Asian equities juiced with borrowed money.
This year so far, $10 billion in net fresh assets have flowed into Asia-based funds, according to Eurekahedge – the best year since 2007 – while performance has added another roughly $4 billion.
"The investor demand is there, but for the right manager with the right edge and the record," says Seth Fischer, who runs Hong Kong-based hedge fund Oasis Capital Management. Much of the money is now coming from the US, while European investors were the ones who fled during the financial crisis, says Angharad Fitzwilliams, a director in the hedge fund capital group at Deutsche Bank in Hong Kong.
These US investors are looking for more reasonable returns and more willing to accept lock-ups. "The changes in the investor base have gone hand in hand with the changes in the industry in the past couple of years," Ms Fitzwilliams says.
Right before the financial crisis, annual returns hit 20 percent or higher before fees – but there was next to no downside protection. The Asian industry lost almost a third of its assets to redemptions and bad performance between the end of 2007 and the end of 2009, according to Eurekahedge. Hedge funds in Europe lost about one-fifth of assets in the same period.
Attracting longer-term US investors requires investing in back-office functions, including risk controls – in part because of the Bernard Madoff scheme and other frauds uncovered there in the financial crisis.
"It is very difficult to be the Hong Kong corner-store with any credibility these days – for investors, there is too much regulatory and business risk," says Geoffrey Barker, who is about to set up a macro fund in partnership with City Financial, a London-based fund business.
Tim Wannenmacher, head of prime services at UBS in Hong Kong, says the quality of big fund launches has changed dramatically in the past couple of years. "They have a totally different and very professional back-office set-up," he says.
Another senior prime broker in the region says that US investors are interested in good Asian funds but are not dedicated to making investments there. "These guys are looking for the best returns and the best managers globally, so good Asian managers have to stand out globally," he says.
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Three Hong Kong-based funds that launched in 2011 and went almost straight into the $1 billion-plus bracket are seen by many in Asia as typical of the new approach: Azentus, Asia Research and Capital Management, and Myriad Asset Management.
Like other large funds, such as Dymon Asia or Janchor Partners, these funds set up with strong chief operating officers who had as good a reputation as the managers themselves.
If the industry is still a teenager, then so are Asia's capital markets. Investors still worry whether its markets have the liquidity or capacity to support hedge fund activities. Mr Fischer of Oasis says he has hesitated about raising more funds since the crisis because of concerns about his ability to deploy them. John Ho at Janchor Partners has as much money in undrawn commitments as he has under active management.
In 2012, the industry saw $4.5 billion of withdrawals as investors grew nervous about the lack of fresh equity and M&A deals in the region and poor 2011 performance.
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But the industry is proving more robust and better at trading profitably through the dips because of the growing diversity of strategies and markets in which to invest, according to David Walter of PAAMCO, a $15 billion global fund of hedge funds that is investing more in the region.
This June, when markets in Asia were roiled by fears that the US central bank would start to wind down its extraordinary money-printing policies, Asian hedge funds saw $3.2 billion of net withdrawals – but crucially managed to add $300 million through performance, with many individual managers doing significantly better, Mr Walter adds.