Hedge funds are taking pain from the events of last week, but they are taking steps and cutting risk, even if it means posting a rotten month in August.

As an example of a contrasting, obdurate stance, over in Thailand, the local banks are, as usual, in a state of denial, refusing to mark-to-market their CDO holdings on the rationale that they now plan to hold on to them until maturity.

Whether or not this makes a mockery of modern accounting practices, many retail investors will be familiar with the idea of an investment becoming a ælong-term holdÆ once its price tanks.

Even though there has been considerable speculation about the general fate of hedge funds, those are taking short-term pain and cutting risk will endure this market chaos. Here, weÆre not talking about those probably doomed hedge funds which are hopelessly mired with loss-making CDOs and filled to the brim with subprime assets, but rather the ones with leveraged market exposure which are now taking chips off the table.

We spoke to the hedge fund managers at Central Asset Investments, which runs the CAI Global Fund, a Hong Kong-based multistrategy fund with an Asian focus. The fund operates long/short equity, convertible arbitrage, merger arbitrage and opportunistically invests in fixed-income and credit.

The firm is run by CIO Eddie Tam and COO Vishal Tourani alongside portfolio managers Jeffrey Kwan and Armand Yeung. Before Tam and Tourani established Central Asset, they worked together in the equity derivatives department of Credit Lyonnais and helped set up the Asian office of US hedge fund Fore Research.

ôWeÆve been liquidating positions and de-risking the portfolio,ö says Tam. ôYes it's been traumatic, but we have been flexible and in the last month, we have removed all leverage from the book, and our net exposure is down from 98% to 20%."

In the first seven months of 2007, their fund was up about 30%, including 7% in July. In August, they have given back about 5%-6%. That ranks CAI at about the middle of the pack, with the above average Asian funds down on average about 175 basis points and the sub-par ones down 15%. Of course the really unlucky funds have bet, and lost, their entire ranch.

So for CAI, 6% has been the full extent of the pain. Leverage has been eliminated and market exposure is largely erased. That doesnÆt sound like a bad trade-off.

ôAsian economic infrastructure is stronger now than 10 years ago, and I donÆt think anyone foresees a repetition of the crisis,ö adds Tam. ôHowever, the events of the last two weeks have shown that Asia has not decoupled from the US."

As hedge funds move to cut risk, (and during the volatility of May 2006, it was hedge funds who were the first movers out), then we have to look elsewhere for the names of the long-term investors left behind, and who are hoping for salvation, possibly from Federal Reserve interest rate cuts.