* Investors uncomfortable after losses, rethink portfolios at year-end
* Says investors could return to industry in January if markets calm down
* Says could invest money with managers who have suffered this year
By Laurence Fletcher
LONDON, Oct 24 (Reuters) - Investors are likely to pull money out of hedge funds in the fourth quarter, said Man Group's head of multi-manager Luke Ellis, after many funds suffered big losses this summer amidst the euro zone's deepening debt crisis.
Ellis, who oversees $14.5 billion in assets at the world's biggest listed hedge fund manager, said that while redemptions across the $2 trillion industry have so far been muted despite poor returns, clients considering changing their portfolios may yet pull out.
"There will be a lot of people feeling uncomfortable about performance over the last six months," he told journalists on Monday.
"A lot of people are trying to work out what to do for year-end... I'd expect you'd see net redemptions from the average hedge fund over the fourth quarter."
Ellis's comments come towards the end of a tricky year for the hedge fund industry, which is facing its second year of losses in four after a volatile summer for markets amidst fears over the euro zone's debt crisis and the possibility of another recession.
The average fund is down 5.4 percent in the first nine months of the year, according to Hedge Fund Research's HFRI index.
However, in contrast to the credit crisis, when clients pulled out almost $300 billion net in 2008 and 2009 according to HFR, outflows have so far not been widespread.
Hedge funds actually saw a small net inflow of $8.7 billion in the third quarter, according to HFR, while GlobeOp's Forward Redemption Indicator -- a monthly snapshot of clients giving notice they want their cash back -- fell this month.
However, Man Group itself last month said clients withdrew money over the summer at the fastest pace since early 2009, while star U.S. manager John Paulson, whose Advantage Plus fund is down 47 percent in the first nine months of the year, this month told investors as much as one-quarter of assets could depart in a "worst-case" scenario.
Ellis declined to estimate outflows across the $2 trillion industry, and added that "if things get calmer" then investors -- presented with low bond yields and lower returns from equity markets -- could return to hedge funds.
"There is an enormous amount of cash on the sidelines," he said.
"You could see outflows at the end of October and November, and then a whole bunch of inflows on 1st January. That's entirely credible, depending on what happens. But you might not see the inflows."
Ellis added that some managers nursing big losses may not necessarily suffer heavy outflows if clients have been prepared, and said it could be a good time to allocate to such funds.
"If someone has been through a series of good up periods and told the client base that 'you've got to expect 25 percent drawdowns' ... it could be a good time to allocate money to them."