Asia-focused hedge fund assets dropped to $82.6 billion in the third quarter – despite receiving more than $1.4 billion in net global allocations – as poor performance dragged down AUM, according to newly released data from US-based Hedge Fund Research (HFR).

Assets have fallen from $89.4 billion in the second quarter, representing the first three-month decline in AUM in more than a year.

Volatile market conditions in recent months have negatively impacted fund performance in the regional hedge fund sector, but investors are still allocating to the industry with expectations of future growth.

The benchmark HFRX Asia Composite Hedge Fund Index fell 4.57% in September, after registering a loss in August of 3.67%.

“With continued volatility associated with European sovereign debt and weakening global economic growth, Asian hedge funds represent a crucial area of growth potential for investors,” says Kenneth Heinz, HFR president.  

Regional allocations in the third quarter mostly went to equity hedge strategies and funds with pan-Asian exposure, which respectively received $1 billion and $1.6 billion. At the same time, Asian macro strategies and funds that focus exclusively on emerging Asian markets saw “modest outflows”, according to HFR.

Investors are taking a conservative stance, note industry members who say the fundraising environment in Asia is difficult and highly competitive.

Allocations tend to flow to large funds with experienced managers, which comprise only a small proportion of strategies in the region. Some investors are taking a wait-and-see stance until market conditions and fund performance improve.

In an effort to lure investors, hedge funds are offering lower fees than their global peers and are acceding to demand for segregated accounts.

The dip in Asian hedge fund AUM and performance is in line with global trends. Net inflows to hedge funds globally in the third quarter totalled $8.7 billion, but performance-based losses resulted in a drop in industry capital of $85 billion. As a result, hedge fund assets stood at $1.97 trillion for the quarter, down from $2.04 trillion in the second quarter.

The HFRI Fund Weighted Composite Index, a global benchmark for the industry, fell 6.2% in the third quarter, making it the worst since the fourth quarter of 2008.