Finding the right Asia-based hedge fund managers has proven tough for Singapore's state investment agency Temasek Holdings Temasek's asset management arm, Fullerton Fund Management, met 161 hedge fund managers in Singapore, Greater China, Japan and Australia, but found only 18 of them worth investing in. By comparison, it examined only half that number in North America and Europe but has deposited cash with 22.
"Most hedge funds in Asia are not as well established as those in the West," Gerard Lee, chief executive of Fullerton, told a hedge funds conference in Singapore last month.
"And their track records in most instances haven't exceeded one business cycle. So at this point in time, we still have to track them very carefully, which is why we have diversified part of our investments into Europe and also the US," he said.
The experience of Fullerton, which runs one fund of hedge funds and will launch another focused on Asian strategies in July, highlights the problems the nascent but fast-growing hedge fund industry is facing in Asia - a shortage of good talent and underdeveloped markets.
But that hasn't stopped the industry from booming.
Research and consultancy firm Eurekahedge estimates allocations to hedge funds investing in Asia have jumped five-fold to about $65 billion from $12 billion three years ago, and will grow to at least $85 billion by the end of 2005.
Hedge funds, loosely regulated investment pools, flourished after the stock market bust of 2000.
Globally the industry is estimated to have doubled the size of its assets to around $1 trillion over the last five years, although observers think funds suffered their heaviest redemption's in a decade in the second quarter of this year.
On Monday US Federal Reserve Chairman Alan Greenspan warned that hedge funds had picked the "low-hanging fruit" of easy profits and may be set for a fall as they assume more risks in a quest for high returns.
The number of hedge funds investing in Asia has nearly quadrupled to 566 from 160 in the past three years and at least another 100 funds are expected to be launched by the end of the year, according to Eurekahedge.
But the explosive growth is raising concerns.
"Asia offers some good opportunities, but there's also a risk that it gets crowded. Everybody talks about investing in Asia," said Kaj Bergenhill, portfolio manager for hedge funds investment at Swedish insurer Folksam, which aims to increase its global hedge fund allocations four-fold to $150 million.
"With all the money that's pouring into the industry, there's a chance of dilution in quality and increase in risks."
Asian fixed income markets are not very well developed and the growth of derivatives has been patchy here. And in some markets - such as China and India -- short-selling of stocks is still prohibited or restricted.
Short-selling refers to the selling of a security without owning it in the hope of buying it back cheaper at a later date, and is a favoured strategy of hedge funds in Europe and the US
"Shorting is definitely an issue. And where you can short, it's an issue about the depth and amount of liquidity," said Jeffrey Lindenbaum, managing director, client development in Asia and Europe, at Ivy Asset Management Corp, a subsidiary of the Bank of New York Company Inc.
Ivy Asset manages hedge fund assets of about $15 billion globally, of which Asia accounts for about $3 billion. But over a 10-year period till now, it has invested with only 10 managers in Asia-Pacific against about 150 in other regions.
Eurekahedge estimates nearly 60 percent of Asian hedge funds and almost 70 percent of the assets held by them are focused on equity long-short strategies, which means that the fund manager can take both long and short positions.
"It will be very, very difficult to have multi-strategy, multi-manager hedge fund products focused on Asia, because there aren't that many strategies, and there aren't that many managers with established track records," said Edmund Lacis, regional business head of Pioneer Investments.
But fast growth rates and the varying opportunities in about 15 different economies in Asia are difficult to resist for some.
Swiss-based RMF Investment Management, which manages about $18 billion globally and is part of Man Group, the world's largest listed hedge fund firm, has committed to investing more than half of its assets into Asia.
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