Hedge fund indices show that SeptemberÆs negative 4.6% average performance was the worst monthly return for 2008. October may show an even worse performance.

Funds of hedge funds to some extent have been poised on the sidelines in terms of new investment, holding on to cash and waiting to pick those hedge fund investments that can navigate through the remainder of the credit crunch.

The portfolio manager of GamÆs multimanager Asian product is London-based Kier Boley. During a visit this week to Hong Kong, he spoke to AsianInvestor.

ôUp to the end of this year and in the first quarter of 2009 looks like the best time to allocate to hedge funds,ö he says. ôThe only good thing about a bear market is its ability to separate the good from the mediocre via the huge dispersion between returns.ö

They are looking at hedge fund managers who are disciplined in portfolio construction, as opposed to ones who have tried to time the bottom of the market, then pile in only to find that the markets have carried on falling. Gam is finding that hedge fund managers are less keen to short now that markets have come off so much.

By disciplined portfolio construction, Gam means managers who take a top-down approach and then set very conservative gross and net exposure figures, then look for capital that they can justify and put to work, rather than try to use this as a chance to become a billion-dollar group.

ôWe have liked managers who use cash itself as a bet. In Asia, cash is the best form of defence,ö says Boley. ôThere is the opportunity now for those managers to get on the front foot, to pick up assets at distressed prices as volatility is at highs, spreads are wide, and valuations cheap. But they should be able to generate returns on low exposure without leverage. Say, by taking gross exposure from 30-40% up to 50%.ö

The Gam product is an Asia-Pacific multimanager fund of hedge funds which is down 11% in 2008. It is equity long/short dominated. And its risk profile is designed to produce exposure that is one-third exposed to the market downside and two-thirds exposed to the upside.

ôWeÆre looking for an asymmetric return profile, not necessarily capturing all the upside, but we donÆt want managers who capture 60% of the upside, and 90% of the downside. ThatÆs not the sort of asymmetric profile we want,ö says Boley. ôThere are funds now which may find themselves uninvestable. Those which performed well in providing beta in the upward markets, but could not adjust quickly enough. They will find it difficult to raise cash in the next 2-3 years. An investor might as well go into a long-only fund."

Gam is finding that new managers are a rarity this year, but says it is on the lookout for profit-generating desks seeking to spin out from existing hedge funds, perhaps prompted by internecine disagreements about equity stakes in partnerships.

However, Gam expects that the level of hedge fund closures wonÆt be as high as observers have predicted. For, even if mass redemptions occur, a hedge fund manager, having gone to the trouble of setting up his platform might prefer to keep it technically alive, even if it is just managing his own money. Perhaps the hedge fund manager on a yacht might be about to make a comeback.