Funds of hedge funds see first net inflows for a year

LONDON (Reuters) - Funds of hedge funds are beginning to see net client inflows again after a tough period of redemptions and concerns over the Madoff fraud, S&P Fund Services' director of fund research told Reuters.

An improvement in performance this year after last year's 21.37 percent losses has helped slow down client redemptions and attract new money since the first quarter's big outflows, Randal Goldsmith said.

"For the first time in more than a year it's turned to positive net inflows in May," he said in an interview on Tuesday.

"People were pretty wary of putting new money in... The worst of outflows was the end of last year, and then Madoff led more clients to withdraw... (But) anecdotally I've been picking up ... since February and March that the rate of outflows has been slowing down pretty significantly."

Goldsmith also said funds of hedge funds portfolios rated by S&P and which are run by GAM -- a unit of Julius Baer (BAER.VX) that is to demerge in September -- had probably also seen net inflows recently.

Julius Baer said in May that GAM continued to see net outflows in early 2009, although redemptions had "slowed significantly".

"They said outflows are no worse than one or two years ago ... and they have seen some inflows, but not big inflows," Goldsmith said. "You can read into that that they're into net inflows."

A GAM spokeswoman declined to comment on flows and said the firm is due to report on July 27.

STILL WARY

The $1.3 trillion hedge fund industry has been going through its toughest ever period, with funds of hedge funds under particular pressure after several invested with fraudster Bernard Madoff while others had trouble giving investors their cash back.

Investors pulled out $50 billion in the fourth quarter of last year and a further $85 billion in the first three months of this year, according to Hedge Fund Research.

Performance has picked up this year, with the average fund up 4.76 percent in the first five months.

However, Goldsmith said investors are being much slower to put money back into hedge funds than they were to take it out, possibly because some funds of funds failed to match properly the redemption terms they offered investors with the terms their underlying funds gave them.

"Inflows are coming back more slowly than outflows went out," he said. "I think investors are still a little bit wary of funds of hedge funds in terms of liquidity risk."

He said some funds may start to offer investors a choice between share classes with longer notice periods and lower fees or quicker access to their money and higher fees.

(Editing by David Cowell)

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