Local hedge funds may be asked to return up to 50 per cent of their assets under management - or about US$17 billion - to disappointed investors who are withdrawing money out of the funds following their atrocious performance.
Hedge funds investing in Asia-Pacific, most of which is based in Hong Kong, took the dunce's hat in 2008. Assets under management collapsed 33.4 per cent over the year, compared with an 18 per cent global average, according to Hedge Fund Research.
Hedge funds charge high fees - typically 2 per cent of clients' funds plus 20 per cent of their investment gains - based on promises to provide smooth returns, whatever stock markets do. Investors are outraged that many local managers utterly failed to hedge against falling markets.
Hong Kong's worst performer was the unfortunately named Hindsight Asia, which lacked the foresight to predict the financial crisis and lost 75.2 per cent of its value last year, according to researcher AsiaHedge. By November last year, Hindsight's assets under management had shrivelled to just US$3 million.
The fund owns convertible bonds, which give lenders the option to convert the loans into shares. But the credit crunch put investors off buying convertible bonds and plunging share prices killed interest in such equity-linked debt.
Convertible bond funds have had to mark the value of their assets down to almost zero, reflecting the fact they are barely trading. A Hindsight spokesman declined to comment.