Investors tighten hedge funds' money spigot in H1

BOSTON, July 18 (Reuters) - Investors cut their allocations to hedge funds by three quarters during the first half of 2008 from a year ago as the loosely regulated portfolios posted their worst returns in about two decades.

According to data released by Hedge Fund Research on Friday, pension funds, endowments and wealthy individuals added only $29 billion in new money to global hedge funds during the first six months of 2008. That is down from $118 billion added in the first half of 2007.

The inflow is the lowest for the first six months of a year since 2003, the Chicago-based research group said.

At the end of the first half, the group estimates that the world's roughly 10,000 hedge funds managed $1.93 trillion, only slightly more than the $1.88 trillion they had a year before.

Hedge funds had been so popular that assets doubled to nearly $2 trillion in the last three years, industry data show. But recent poor returns and high profile collapses coupled with high fees -- hedge funds unlike mutual funds charge a hefty performance fee -- helped cool demand for the once red-hot asset class.

Hedge funds lost about 0.75 percent during the first half, HFR reported last week, marking only the second time that hedge funds had lost money in the first half since HFR began keeping data in 1990.

As more nervousness sweeps through the industry, investors are preferring to invest their money in so-called hedge funds of funds, where managers prepare a portfolio of individual hedge funds aimed at reducing risk. Funds of funds now manage roughly $825.9 billion, up from just over $800 billion at the end of the first quarter, HFR said. (Reporting by Svea Herbst-Bayliss, editing by Gerald E. McCormick)