Asian hedge funds posted its first outflow in the first quarter of this year after two consecutive quarters of net capital inflows as the industry was hit with at least $700 million in redemptions as at end March 31, data provider Hedge Funds Research Inc., said.

However, HFRI said the withdrawals by investors was offset by the $1.5 billion positive performance of the industry resulting in total assets invested in Asia-focused hedge funds increasing to just over $77 billion compared with the $75.5 billion in assets as at end Dec. 31, 2009.

The data provider also noted a decline in the number of Asian hedge funds declined to 1,036 in the last quarter.

"Asian hedge funds were confronted with a variety of divergent market influences in the first quarter, and investor flows to Asian hedge funds reflect this," said Ken Heinz, President of Hedge Fund Research, Inc. "Sovereign credit risk has moved to the forefront of investor concern, concurrent with a cyclical upturn in developed markets based on improving earnings and corporate credit, falling equity market volatility and continued regulatory pressure on hedge funds and financial institutions. In this environment, funds which can access these market dynamics with flexible, opportunistic strategies are likely to outperform and attract new investors."

Although the redemption was modest in a relative sense, it is a significant divergence from recent trends in the overall hedge fund industry, which experienced an inflow of $13.7 billion. Asian hedge funds continued to outperform equity benchmarks; the HFRX Japan Index gained +7.6 percent in 1Q10, while the HFRX China Index was down -0.75 percent. 1Q10 was the first quarter since the financial crisis in which Developed Asian hedge funds outperformed Emerging Asian funds.

Within the Asian hedge fund industry, Equity Hedge and Event Driven strategies, which include Distressed and Shareholder Activist funds, have seen the most significant increases in assets since 1Q09. The percentage of capital in Asian Equity Hedge funds in nearly twice that of the overall industry, with much less capital focused on Macro and Event Driven strategies.