Investors snap up U.S. hedge funds even as returns sag
By Svea Herbst-Bayliss
BOSTON (Reuters) - Investors rekindled their love affair with U.S. hedge funds in November when they added $21.8 billion to these loosely regulated portfolios even though returns were the worst since early 2006, new data show.
TrimTabs Investment Research and BarclayHedge said on Friday that the roughly $2 trillion hedge fund industry saw inflows of $21.8 billion in November, up from $16 billion in October and $18.6 billion in September.
Because hedge funds are only loosely regulated they are not required to report performance or flow data to trackers and all data, reported on a voluntary basis, is watched closely for clues to trends.
November's numbers stand in sharp contrast to those of the $12.7 trillion mutual fund industry, where investors pulled $10.9 billion out in November, according to TrimTabs data.
November's flows came despite poor monthly performance in which the average hedge fund lost roughly 1.6 percent. The benchmark Standard & Poor's 500 index fell 4.4 percent.
Analysts expect investors to keep pouring money into hedge funds, judging these offerings the best way to earn returns even if markets fall further amid fears of softer economic growth and the fallout from a global credit crisis.
"Hedge funds growth will continue to outpace mutual funds growth," said Timothy Jester, head of alternative investments and director of research at Capital Advisory Group, predicting people will keep paying high fees to try and get with top performers.
"You want to be with the best ones because the penalty of being with the bad ones is so great," Jester said.
In an already established pattern, so-called hedge funds of funds, which try to take the risk out of hedge fund investing by selecting a number of portfolios, again pulled in the lion's share of new money.
In November investors added $18.9 billion to funds of funds such as those managed by industry heavyweights GAM and Permal Asset Management. This is roughly the same as the $18.8 billion funds of funds took in during October.
After a brief period of caution sparked by heavy, albeit sometimes brief losses at some prominent hedge funds, investors also made new direct investment in hedge funds in November, the data show. They added $2.9 billion, roughly putting back the $2.8 billion they pulled out in October.
Even though performance was lackluster, analysts said the appetite for hedge funds was strong and is expected to grow because even smaller pension funds and endowments now want to invest in funds allowed to use leverage or sell stocks short to earn money in down markets.
Hedge funds use trading techniques that are off limits at most mutual funds. In return they also charge significantly higher fees, packing a double-digit performance fee on top of the management fee mutual funds also charge.
While the average hedge fund returned over 10 percent last year, according to industry trackers like Hedge Fund Research and the Hennessee Group, there were also multibillion dollar losses at several Bear Stearns hedge funds and Sowood Capital.
(Editing by Brian Moss)