Over $200 bln to flow into Asia hedge funds-Deutsche

SINGAPORE, May 13 (Reuters) - Investors may pile more than $200 billion into hedge funds focused on Asia excluding Japan this year, betting on emerging markets despite concerns about the global economy and waning risk appetite, Deutsche Bank said.

The bank's annual Alternative Investment Survey also showed that 58 percent of investors would not consider applying leverage -- investments with borrowed funds -- to their portfolio this year.

"Hedge fund investors' predictions that Asia, along with the Middle East and Latin America, will be the top-performing regions in 2008 indicate a clear re-allocation of capital towards emerging markets," Denis MacCarthy, head of equity sales Asia ex-Japan at Deutsche Bank (DBKGn.DE: Quote, Profile, Research), said in a statement on Tuesday.

Deutsche said that 70 percent of hedge fund investors do not currently apply leverage to their portfolios in a sign that market participants are becoming reluctant to take too much risk in the aftermath of the collapse of the U.S. subprime mortgage market, which also blew up several hedge funds.

"For the first year since the survey has been conducted, investors have added risk management as a major manager selection criteria, in addition to investment performance, investment philosophy and manager's pedigree."

Deutsche said investors are also betting on higher volatility, the third big investment strategy after macro and distressed assets.

"Volatility in Asian equity markets has been particularly acute and we expect this to remain a dominant theme in the region for the remainder of the year," Deutsche's MacCarthy said.

This year's market turmoil has undermined returns at Asian-focused hedge funds, which manage $156 billion according to Eurekahedge.

After producing five straight years of double-digit percentage gains, the Eurekahedge Asian Hedge Fund Index is down 7.9 percent this year up to March. This compares with declines of 1.7 percent and 3.2 percent respectively in its North American and European indexes.