Hedge fund managers craving higher returns from investments before initial public offerings are taking a one-way bet on such deals in emerging Asian economies such as Indonesia and will be left with big losses and no exit if they go awry. Credit Suisse, Deutsche Bank, Merrill Lynch and other banks are scouring Indonesia to find firms, which are looking to raise money but are not ready for the public market, so they can link them up with hedge funds in profitable private deals. Hedge funds are flocking to these investments in a number of emerging economies, since they can count on a substantial discount for buying at such an early stage with the aim of flipping them for a big profit soon after an initial public offer. The strategy seems foolproof when markets are going well, as they are now. But if the share-sale plans of such companies become derailed for any reason, investors could be sitting on worthless assets, a risk against which they may not be protected. 'At the moment, hedge funds are aggressively coming to this market,' said Rizal Gozali, a managing director in Indonesia investment banking for Credit Suisse. 'They always come to us and ask us about investments in pre-IPO private placement deals. The demand is always there. 'They've become more and more relaxed [on terms],' he said, but added that investors were still much more demanding than they were before the 1997-98 Asian financial crisis. Investment bankers have been talking up Indonesia as a hot spot for pre-IPO activity for the past couple of years, as investors renewed their faith in the country. The Jakarta Composite Index is up 70 per cent since the end of 2005. 'There's so much liquidity out there,' said Gita Wirjawan, the head of Indonesia for JP Morgan, noting how many foreign investors failed to remember the Asian financial crisis - or heed existing market risks. 'Until that liquidity gets sucked out of the system, Indonesia will not have a problem attracting money from investors.' While demand for Indonesia exposure was keen among private investors, activity had lagged expectations as bankers said it was hard to find the right candidates. It is also hard to track such deals, which are by their nature private, but notable transactions include last year's US$279 million structured financing for a buyout of No4 coal company Berau Coal, followed by a US$325 million bond issue. Deals in China include a US$200 million convertible bond for small property firm Skyfame Realty (Holdings) last month, which allowed hedge funds and investors such as Merrill Lynch to help the firm fund a hotel and office tower acquisition. Arranging pre-IPO deals, which can carry fees of up to 7 per cent, has become attractive to banks as fees get squeezed around the region, particularly in markets such as India.