Hedge funds haunted by Asia pre-IPO deals

By Michael Flaherty and Jeffrey Hodgson - Analysis

HONG KONG (Reuters) - Before the Chinese initial public offering boom began to fizzle late last year, hedge funds jumped to buy stakes in hot companies before they went public, an investment known as pre-IPO financing.

What seemed like a good idea at the time is about to come back and haunt them.

With Asian capital markets all but shut, forcing billions of dollars worth of IPOs to be shelved, many hedge funds are sitting on illiquid and often hard-to-price pre-IPO investments that in some cases could end up worthless.

The problem might not be as severe if markets were still rising or at least steady. But the financial market bloodbath of recent weeks has made a miserable situation dire for many Asia hedge funds, one of the world's worst performers even before the latest surge in volatility.

"You can hold at cost, but when people start demanding their money back, that's when you get into trouble," said a Hong Kong based investment fund manager who did not want to be named.

Huge numbers of clients are said to be pushing to redeem their investments. Sources close to the situation say the hedge funds under the greatest pressure, small players holding a large percentage of illiquid investments like pre-IPO stakes, will be forced to close up shop.

Among the firms that took part in pre-IPO financings of Asian companies were DKR Oasis, as well as U.S. hedge fund giants such as Stark Capital, Och-Ziff Capital Management Group LLC and Citadel Investment Group LLC, according to several investment bankers who did not want to be identified.

The four firms declined to comment.