A spokesman for HSBC Global Asset Management told Reuters on Thursday it was to close the India Alpha fund, a long-short equity fund launched in 2007.
At its peak in 2008 the fund was more than $300 million in size. By the end of December it had shrunk to $85 million.
The news came during a testing time for the $2.3 trillion hedge fund industry, with many funds struggling to win over investors after lacklustre performance in recent years.
Some investors doubt the extent to which hedge funds can shield them from falling market and benefit them during rising markets, with many concerned about the level of fees.
The India Alpha fund gained 26 per cent in performance terms last year, compared with an average 10.3 per cent gain from emerging market hedge funds, according to Hedge Fund Research.
However, it lost 26 per cent in 2008's market turmoil and was down again in 2011. Since launch, it is up 39 per cent.
Singapore-based Mr Duggal and his team, who manage more than $6 billion of Indian equity assets including the flagship $3.8 billion HSBC GIF Indian Equity fund, remain at the firm, a spokesman said.
The firm said it assessed products on a range of criteria, including "assets under management, profitability, sales interest and commitment, as well as scalability."
"The HSBC India Alpha fund was reviewed in light of this to determine the extent to which the fund is aligned with the broader business strategy and it was concluded we would close the fund as it did not meet our criteria going forward," it said.
Investors put a net $3.4 billion into hedge funds in the fourth quarter of 2012, according to HFR, the weakest quarter last year.
A number of other hedge fund firms have seen outflows recently. Edoma Partners, one of the most talked about hedge fund launches since the financial crisis, said in November it was closing two years after it started, hit by poor performance and a flurry of investor redemptions.
This month Reuters revealed that hedge fund giant Winton Capital had seen $1 billion of investor redemptions.
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