Only around 20 per cent of Asian hedge funds have managed to turn in a profit so far this year, said the head of UBS Asian prime brokerage yesterday (October 16).

Fund performance in Asia is marked by 'great dispersion' amid the market turbulence, with returns ranging from negative 40 per cent to profits of 20 per cent, said David Gray, UBS' head of prime services for Asia Pacific.

Gray, speaking on the sidelines of a hedge fund conference organised by UBS, said funds are seeking to preserve cash rather than find higher returns. They are also reducing leverage and have generally been buying more liquid investments.

Fund managers, who rely on prime brokers for loans, trade clearing and bookkeeping, have also been hit by the failure of several key prime brokerages. This has left their assets frozen.

Earlier this year, hedge funds fled Bear Stearns, once the world's third-largest prime broker, before it went belly-up in March and was acquired by JP Morgan.

Similarly, hedge funds exited Lehman Brothers prior to its bankruptcy last month, and in the aftermath, Morgan Stanley has reportedly lost about a third of its hedge fund business.

UBS' Asian prime brokerage, the third-largest in Asia after Goldman Sachs and Morgan Stanley, said it is the beneficiary of 'billions' of dollars in new assets from hedge funds. The market shares of the remaining players will "shift quite significantly" in the coming months, noted Gray.

More changes are afoot in the industry. The prime brokerage model is being re-evaluated to address issues in the custody of hedge fund assets while a shake-out is eliminating weaker players.

Gray noted that the growth of hedge fund assets in Singapore, which had doubled last year, will take a hit as redemptions rise and performance falls.

Still, Singapore-based hedge fund Komodo Capital, which manages US$105 million of assets, sees great opportunities to extract value in the downturn.

Its chief investment officer Angus Cameron believes the market turbulence will "separate the wheat from the chaff" in terms of successful funds that can ride through the volatility.

Robert Lewis, managing director of Novatera, an $80 million hedge fund in the niche business of seeking to unearth 'small-cap hidden jewels' across the Asia-Pacific, noted that market valuations have fallen significantly.

So this is "a great environment for value" for Novatera, which treasure-seeks among the companies in which it can stay invested for three to five years, he said.