Investors falling out of love with hedge funds

Fri Dec 16, 2011 10:57am EST
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By Laurence Fletcher and Sinead Cruise

LONDON (Reuters) - Deep cracks are starting to show in the love affair between hedge funds and their investors, after another year of paltry returns on expensive investments leaves many feeling cheated and close to bailing out.

An asset class once feted for its ability to make money in all markets is back under the spotlight after the average fund lost 4.4 percent in the first 11 months of the year, data from Hedge Fund Research shows.

That tepid performance comes just three years after hedge funds lost an average 19 percent in 2008's market chaos, and raises serious questions about the industry's future growth, particularly in light of the huge fees the managers often earn.

"I'm disappointed at the level of returns," said one large institutional investor who asked not to be named. "The hedge fund industry has once again been underwhelming people's expectations.

"It's an expensive asset class ... They're going to have to have another 2001 or 2003 in the next three-to-five years if they expect the industry to grow," the investor said.

Hedge funds, which made money both in 2001's tumbling markets and 2003's rally, have been caught out this year by whipsawing markets and high volatility amid the euro zone's prolonged and deepening debt crisis.

Equity funds -- which often rely on fundamental stock analysis -- have been particularly hurt, while macro funds, which bet on stocks, bonds, currencies and commodities, have also left some investors disappointed.

Star managers have suffered, notably John Paulson, whose main Advantage fund was down 47 percent to the end of November, while Crispin Odey's European fund is down around 15 percent to end-October, despite big gains in the autumn rally.   Continued...