For fund management executives nursing severe drops in assets under management due to redemptions and devaluations, the credit crunch hardly looks like a gift. Asia's hedge funds have been decimated and even the biggest traditional houses are retrenching.

But the industry's survivors have a chance over the medium term - say five years - to fill a vacuum in providing financial services to a global economy desperately short of credit - so argue partners at Clifford Chance, who mused yesterday to Hong Kong journalists about how they see financial institutions adapting in the wake of the global financial crisis.

London-based partner Michael Bray suggests participants in Asian capital markets should prosper relative to those in America and Europe because there is no political pressure here to punish bankers; Asian taxpayers are not bailing out financial institutions. Therefore the risk of over-regulation is not as high in Asia, which will be able to pick the more sensible reforms from the West without going overboard.

The exception is with regard to structured products and distribution of investment products, stemming from street protests in the wake of the Lehman minibond fiasco in September.

Here, Bray is critical of the preference among Asian securities and bank regulators to pressure banks into fully compensating retail investors. Rewarding investors en masse is creating "acute moral hazard" among a group of customers that, in general, are aggressive about seeking higher returns, Bray says.

Mark Shipman, Hong Kong-based partner, says that regulatory reform in Asia will go beyond mere issues around mis-selling and product transparency, however. If investment and commercial banks in the West revert to traditional models of taking deposits and lending assets, so will those in Asia - but for different reasons. The mis-selling debacle in Asia is likely to see regulators separate investment advice and product sales from deposit-taking or lending activity. Banks may need to establish separate brokerage units to remain in the business of distributing investment products, he suggests.

He goes further to believe that, in Hong Kong at least, authorities are discussing the idea of moving to a single, universal regulator - as has happened in Britain, more recently in Japan and, effective this week, in Korea. (That said, Shipman says it will take several years for this to be realised, if Hong Kong does decide to create a universal regulator.)

This will have a profound impact on the asset management industry over time. Bray points out that it won't do for governments to simply get rid of the originate-to-distribute securitisation model, despite Main Street pressure for heavy regulation.

"Growing economies need more finance," he says. In the 1990s it became obvious that banks' lending books were insufficient, given capital requirements and the cost of lending. Securitisation was meant to expand access to capital by spreading out the risk. "The model was flawed but the rationale still holds," Bray says. "Liquidity is about velocity, the speed with which money can move throughout the system."

The need for finance is even more acute for emerging markets seeking to maintain (or restore) high levels of economic growth. Although Asian banks may not suffer from such a heavy hand, their activities will nonetheless be curtailed.

"I see the expansion of the asset management industry in Asia over time," Shipman says. "We need alternative fund vehicles with private pools of capital to lend." He notes that today most of the bombed-out Asian hedge-fund space consists of equity long/short managers. The industry needs, and will get, more credit-oriented funds that can meet Asia's financing requirements, he predicts.

"Today fund managers have suffered a severe drop in AUM," Shipman notes. "In the short term they face shrinkage and consolidation. In the medium term, they'll play a bigger role."

He expects to see more asset managers step into traditional investment banking roles, providing advice to corporations in the region. (AsianInvestor reported as early as mid-2007 that big buy-side players such as Pimco had already begun to do this in America.)

But for the funds industry to realise this potential requires two things. First, globalisation of financial services must remain intact and not succumb to protectionism, capital controls and the "Balkanisation" of regulatory regimes, as Bray puts it. How governments regulate asset managers will be important, particularly the decision to regulate the funds as corporate entities, as the US does and Germany may do, versus regulating fund managers, as is the practice in Hong Kong and Britain. US authorities are likely to require hedge funds to register their activities and clientele, but Bray reckons other jurisdictions should not follow suit.

The second ingredient, particularly in Asia, is talent. There are very few people with the right experience to set up credit investment strategies. Asset managers may benefit from an infusion of talent from investment banks, but the degree of this move will depend on regulation and the extent to which investment banking remains lucrative. Fees in the hedge-fund world are also under pressure, and only the desperate will be seeking to create a boutique hedge fund in Asia from scratch.

Outflows of talent to asset managers will also depend on the extent to which governments reform versus stamp out securitisation. Bray says the only way out of the credit crunch is to get securitisation back on its feet, based around simple products based on easily calculable streams from things like mortgages and credit card receivables. "We'll still need credit-rating agencies," he says, adding an optimistic note that the harsh experience of the credit crisis will dissuade financial institutions from returning to complex products.

The positive scenario sees a new set of best practices put in place that leave securitisation on a sustainable footing, to complement bank lending and support economic growth. A gloomier outlook has over-regulation squeezing this source of financing. Ironically, the worse it gets for investment banks and corporations seeking capital, the bigger the opportunity for a retooled buy-side to step in.