ôI think the February sell-off marked the end of the bull market and was the beginning of a bear market,ö says Eugene Kim of Asia ex-Japan fixed income hedge fund Tribridge Capital. ôRisk appetite will be cut because of losses in the US housing sector. It is potentially game-over in the emerging markets if the United States tips into recession.ö

So kicked off a discussion among regional hedge funds about the state of markets this year at last weekÆs industry conference in Hong Kong organised by GAIM.

Apprehension is shared not just by those looking at the US, but closer to home. Zhang Haitou, CIO and managing director at Citic Capital in Hong Kong, is dubious that the A-share markets of mainland China can match last yearÆs epic performance.

öWe are cautious about the impact of capital flows,ö he says. ôThe imbalances have been there so long. There is nothing easy for the rest of the year. Many prices seem exaggerated.ö

A risk in China is if investment-led growth slows down, Ashutosh Sinha, managing partner of Amoeba Capital Partners, an Asia ex-Japan long/short equity fund that may close to new investors in the next few months.

He sees an analogy in IndiaÆs sharp correction last May, when many foreign investors sold first and asked questions later û and thus missed out on a swift recovery. Savvier managers are now recouping losses from last monthÆs volatility, and the industry has become conditioned to buy on dips.

ôWeÆre now programmed to buy into any first market correction, though that behaviour may not be repeated in the event that a second correction downwards occurs,ö says Samir Arora, managing director long/short India fund Helios in Singapore.

Hedge funds hanker for the return of volatility, however, so they see 2007 as offering better pickings. They believe volatility has been unnaturally quiet in the past few years and is now returning, which will allow them to make money on the short side.

ôMarkets have been one way: up,ö says Eugene Kim of Tribridge. ôFor those of us with an arbitrage strategy, that has cost us in terms of shorts. IÆm concerned, however, about CDOs defaulting. That appears to be where most of the leverage is.ö

But trouble can lead to opportunities, and there remain many positive trends, such as the expansion of IndiaÆs private sector.

ôTwenty-three of the new billionaires in India have made their money by setting up enterprises that compete directly against government-owned companies,ö says Arora. ôValue has been transferred to the private sector without privatisations having taken place.ö

AmoebaÆs Sinha likes infrastructure and power equipment in India and consumption in China, observing that there is still under-consumption in China relative to savings levels there. He thinks Filipino banks could see loan growth of 20% this year, which will drive their earnings upwards. He is optimistic about Philippine property too, though has shorted Hong Kong property companies.