The good news is very good: Asian equities received $100 billion through mutual fund flows in 2010, according to research from New York-based Strategic Insight.

The bad news is that very little of this is being captured by Asian mutual funds. The lion’s share is to funds domiciled in the United States, Europe and other locales. This reflects ongoing difficulties in various Asian markets for the local funds industry.

The other piece of bad news is that in 2011, a sell-off in emerging markets means that net flows to Asia have been flat. "Flows so far this year have diminished by 90% from 2010," notes Jag Alexeyev, managing director at Strategic Insight.

He believes this decline is short term, with the Asia story set to continue over the medium and long term.

Strategic Insight predicts $1 trillion of flows will go to Asian financial markets (including bonds) over the next decade. But it remains to be seen whether Asia-based funds can benefit the most, or if the trade will continue to be dominated by Western fund managers operating outside of the region.

That $100 billion of annual flows is based on analysing the global funds industry and adding up allocations to Asia, including Japan and Australia, fund by fund, including Asia-dedicated products as well as global or emerging-market ones.

The biggest share is in Europe, where Ucit-regulated funds had at least $650 billion of assets committed to Asia-Pacific in 2010, $450 billion to Asia ex-Japan, ex-Australia.

Indeed, Strategic Insight estimates that up to 25% of all assets in European-domiciled funds are invested in Asia, producing net inflows of $180 billion in 2010.

These include Franklin Templeton’s Asian Growth Fund, First State Investment’s Asia-Pacific Leaders Fund and Fidelity International’s South East Asia Fund.

In the US, Asia allocations are mainly via global emerging-market funds. The leaders are passive instruments such as Vanguard and iShares ETFs tracking the MSCI Emerging Markets index, or active emerging-market products from the likes of Oppenheimer Funds and Dodge & Cox.

Despite these huge inflows, funds in Asia-Pacific are missing out. Asia represents about 7% of the $30 trillion of worldwide assets under management (or 12% if you include Australia), despite accounting for 25% of global GDP and 30% of worldwide stock-market capitalisation. Last year, Asia funds gained only 12% of the $1 trillion of net inflows to long-term (ex-money market) funds in 2010.

Strategic Insight notes that this has not always been the case. In 2007, Asia-domiciled funds accounted for the majority of net inflows worldwide. Moreover, the biggest inflows currently in the region are to Japan-domiciled funds, which primarily represent local investment, and usually to global bond funds.

The reason for this dichotomy of huge flows to Asian equities and few flows to actual Asian products is mainly regulatory, says Strategic Insight, naming new compliance procedures in post-minibond Hong Kong, fee disclosure rules in Taiwan, and the ban on front-end loads in India. In many cases fund flows to offshore products have soared while local fund industries have stagnated or suffered redemptions.

The good news is the majority of Asia-based fund houses are still growing, albeit slowly. Strategic Insight says 400 such firms have enjoyed net asset growth over the past two years, with most ahead of 2007 levels. This is helping them to expand business beyond their home market.

So the picture is still positive, but it’s one of opportunity cost – where might Asian fund houses be (as well as global firms' onshore businesses) if they were able to benefit more directly from the massive global demand for Asia exposure? And the question is whether a combination of tweaked regulation, improved consumer confidence and smarter marketing can allow Asia’s own funds to win the lion’s share of future flows.

Alexeyev believes both local players as well as international ones will enjoy parallel growth rates. He says precedents in other markets combined with broadly accepted growth expectations and demographic shifts in Asia suggest a much greater uptake of funds by local investors over time.

Both international and domestic vehicles can benefit. Ucits will continue to be attractive, given their ability to deliver scale via master-feeder funds, as well as the brand power of global names with established track records and investment processes. But those local players able to establish a leadership position and offer products or services that global players can't match should also do well -- as several Japanese firms and boutiques in Hong Kong and Taiwan are already proving, says Alexeyev.