Investors return to hedge funds: Margaret Doyle

-- Margaret Doyle is a Reuters columnist. The opinions expressed are her own --

By Margaret Doyle

LONDON (Reuters) - Fear and greed motivate financial markets, and greed appears to be back. Hedge funds had a torrid 2008 -- losing money, blocking withdrawals, failing with due diligence and even shutting down -- despite the industry's promise of "absolute return". However, figures released by Eurekahedge show that investors are returning, putting in a net $4 billion in June.

It's hard to see why. The old joke is that a hedge fund is a remuneration scheme masquerading as an asset class, and one characteristic of an industry that defies definition is the size of the fees.

Hedgies defend "two and twenty" -- 2 percent management fee and 20 percent of the annual return above a certain threshold -- on the grounds that they would outperform those dull long-only fund managers. Moreover, the focus on "alpha" -- jargon for returns uncorrelated to the market ("beta") -- would allow hedge funds to deliver "absolute", rather than relative, returns. They might not beat market returns in the good years, but they would not lose money in the bad years.

2008 put paid to that theory. Investors discovered that the previous excess returns owed more to gearing than investment strategy. Worse, when they tried to redeem their depleted capital, funds invoked the small print to stop them.

The coup de grace was (or ought to have been) the revelation that several funds which invested with the fraudster, Bernie Madoff, had been charging a further layer of fees, supposedly to do due diligence.

Now regulators around the world are bearing down on the industry and credit has dried up. This tale of woe should, at the very least, prompt those re-investing in hedge funds to demand better terms. Some distressed hedge funds have resiled, but most have not.

Man Group (EMG.L), Britain's biggest listed hedge fund, reported that its gross margin on private investors remained "robust" in the year to the end of March, slipping slightly to 4.33 percent, and remains strong. Yet retail inflows exceeded outflows in the quarter to the end of June.

With investors' memories this short, perhaps it should not surprise us that fund managers hold fast to their fees.

(Editing by Martin Langfield)