For Michael Preiss, whose firm oversees $1.9bn (£1.55bn) mainly for wealthy Asian families, adding hedge funds to his clients’ portfolios was an easy sell some years ago. Not anymore.

The executive director at the Singapore-based Taurus Wealth Advisors multi-family office said his clients are disappointed with mediocre hedge fund returns and are balking at high fees, prompting them to shift to private equity.

With redemptions already at a four-year high, Asia’s richest people comprise an investor group regional hedge funds can ill afford to lose. Family offices representing billionaires and multimillionaires are a key source of capital in Asia, where global pension funds and university endowments haven’t made large inroads. Managers seeking money for new hedge funds are likely to be the hardest hit.

“Asia’s hedge funds are smaller than their global peers, meaning they are more dependent on money from high-net-worth individuals and family offices,” said Melvyn Teo, professor of finance at Singapore Management University. “If family offices withdraw money, the region’s hedge fund industry will clearly feel the pinch.”

UBS said in November family offices worldwide have turned away from hedge funds after they trailed stock markets in the wake of the 2008 financial crisis. The trend is even more pronounced in Asia, where family offices set more aggressive performance goals, according to Eric Landolt, UBS’s head of family advisory for Asia Pacific.

“Family offices are usually here to add wealth to the family,” said Landolt. “It is a growth engine for the family, whereas in Europe or the US there is a much stronger wealth-preservation angle.”

Managers seeking capital from outside Asia may find few takers. Ray Nolte, chief investment officer of $8bn US-based fund of hedge funds SkyBridge Capital, last month said he’s shunning Asian hedge funds because of mounting risks in China’s debt markets. SkyBridge has less than 5 per cent of its assets in Asian hedge funds, Nolte said. That compares with 85 per cent in the US and 10 per cent in Europe.

Hedge funds investing in Asia suffered $1.6bn of withdrawals through November, on track for the biggest outflows in four years, as their returns trailed the industry globally, according to the latest estimates from data provider Eurekahedge Pte.

“The big hedge funds have become complacent, meaning they put more emphasis on the management fee than performance fee,” Taurus’s Preiss said. “For instance, a $1bn fund tends to focus on capital preservation and getting the management fee instead of working on a decent performance.”

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The ultra-rich families backing Taurus instead want to put their money directly into technology companies, according to Preiss. Taurus has about 10 per cent of client assets allocated to alternative assets.

At $500m multi-family office Golden Equator Capital Pte, the shift has been even more drastic. Over the past two years, the share of assets allocated to hedge funds has more than halved to less than 10 per cent, while private-equity investments have doubled to 20 per cent, according to founder and chief executive Shirley Chua.

Chua said her clients are particularly interested in closely-held US firms focusing on disruptive technologies such as car-hailing firm Uber Technologies Inc. or Magic Leap Inc., a US startup working on a device that simulates reality.

“There is great interest in the unicorns,” said Chua, who before setting up Golden Equator assisted high-net-worth individuals from Asia and Europe as a director at Citigroup Inc. in Singapore. “Our clients want to participate in the new economy.”

Taurus and Golden Equator are part of a wider shift that’s undermining hedge funds.

The average share of alternative assets, mostly real estate and private equity, in Asian family office portfolios increased by 3 percentage points to 44 per cent in the two years through May 2016, according to UBS data. The proportion allocated to hedge funds fell 1 percentage point to 5 per cent.

New hedge funds in Asia are particularly affected by the reluctance of family offices to invest, according to Singapore Management University’s Teo.

“Especially for hedge fund startups, the bar has been raised because of this,” he said. “A lot of them depend not on institutional investor capital, but on capital from high net worth individuals and family offices so that they can get up to critical mass. It becomes a problem if family offices start to shy away from this.”

Shiraz Poonevala, director of investments at Bangkok-based family office GP Group, which only invests its estimated $500m of assets directly, say it’s also a matter of Asia’s richest families wanting more control of their assets.

“I look my boss in the eye every day, and I have to answer to him,” he said. “Maybe I don’t get super returns, but at the same time I don’t do super silly things because I have to see him every day. A hedge fund is like writing a check and then hoping for the best.”