A hedge fund set up by former Goldman Sachs trader Morgan Sze -- the biggest launched in Asia in 2011 -- lost 6.8 percent last year, two sources with direct knowledge of the matter told Reuters, as it was rattled by a sharp drop in Chinese shares.

The Hong Kong-based multi-strategy hedge fund, Azentus, which can invest globally but focuses mainly on companies related to Asia, had a blockbuster start with assets of about $1 billion on April 1 last year and now manages $1.9 billion. Its performance is keenly watched in the regional industry.

By comparison, the Eurekahedge Asia Multi-Strategy index was down 4.9 percent between April and December last year, while regional hedge funds lost about 9 percent during the period.

Azentus had a good first six months up until the last week of September when it lost money big time, primarily from its exposure to China, one of the sources said.

Chinese shares as measured by the MSCI China Index <.dMICN00000PUS> plunged 20 percent last year on fears of a global downturn, accounting scandals at U.S.-listed Chinese firms and a mountain of local government debt, raising worries on the health of Chinese banks.

The hedge fund had a light exposure to China's 'A' shares and most of its losses came from investments in the Chinese stocks listed in the United States, the source said.

Azentus's Chief Operating Officer Roger Denby-Jones declined to comment. The sources were not authorized to speak to media.

U.S.-listed Chinese firms such as Baidu Inc , Sohu.com and SINA Corp plunged between 27 percent and 41 percent in September.

Started by Sze, former head of Goldman's Principal Strategies group, Azentus Capital Management was one of the biggest hedge funds to launch since the onset of the credit crisis and one of the most high-profile in Asia.

The fund lost 1.4 percent in December and 1.7 percent a month earlier and is headed into 2012 with about 120 percent gross exposure, one of the sources said. Gross exposure refers to the sum of long and short positions of a hedge fund.

FORGETTABLE YEAR

Hedge funds globally recorded one of their worst annual performances ever in 2011, with the average fund down 4.8 percent, according to data from Hedge Fund Research.

This marks only the third calendar year since HFR began measuring industry-wide performance in 1990 that hedge funds have finished in the red.

Some of the high-profile names in the global industry stumbled, with John Paulson losing more than half of the capital in one of his firm's biggest funds last year.

(Editing by Chris Lewis and Muralikumar Anantharaman)

China Investment Down