The second quarter of 2008 saw Asia-focused hedge funds around the world gain capital inflows of $530 million from investors, says Chicago-based Hedge Fund Research. But the industryÆs total assets under management grew by a mere 0.25% (about $200 million to $100.48 billion) because managers have lost $320 million in volatile markets.

And while the industry did enjoy net inflows from investors in the second quarter, the gain is nearly half the $1 billion gain from the first quarter, suggesting that investor interest is flagging.

As absolute-return vehicles, hedge funds are failing the test this year. Those Asia ex-Japan-focused strategies tracked by HFR have in aggregate lost -15.86% year-to-date, while Japan-only strategies have lost -7.14%, and Asia including Japan strategies are down -8.29%.

They are in aggregate doing better than benchmark indices such as the S&P500 with dividends (-11.9%), JapanÆs Nikkei 225 (-12%), IndiaÆs Sensex (-33%) and Chinese equities (-45%). But investors arenÆt paying hedge-fund fees for relative performance.

Certain strategies are flourishing: arbitrage strategies have done well, enjoying asset growth of $730 million. Multi-strategy products have gained inflows of $720 million. And the niche area of fundamental growth-equity has surged by $1.19 billion.

But event-driven strategies have seen net assets tumble by $525 million, while general equity hedge strategies (which account for over 63% of AUM and 74% of the total number of Asia-focused funds) have lost over $600 million in capital. Market-neutral equity and fundamental-value strategies together suffered capital withdrawals of $1.1 billion.

One reason for the pain among Asia-focused players is the overweening role of equity long/short strategies, at a time when favoured sectors such as macro are thin on the ground, notes Kenneth Heinz, president of HFR.