February 7, 2008 / 6:15 PM / 12 years ago

Investors punish hedge funds for poor returns

BOSTON, Feb 7 (Reuters) - Investors punished hedge funds for poor performance in December, when they dramatically cut the new money they sent to its lowest level in two years, new data released on Thursday show.

Pension funds, endowments and wealthy individuals put only $2.3 billion into hedge funds in December, down from $21.8 billion in November, according to data from TrimTabs and BarclayHedge, which track flows and performance.

“Flows tend to follow performance, and hedge funds are no exception,” said TrimTabs Chief Executive Charles Biderman.

“In November, hedge funds lost 1.7 percent, which was their worst performance since September 2001,” he said. “In December, the inflow into hedge funds was the lowest in two years.”

In October investors added $16 billion after putting in $18.6 billion in September, the data show.

Because hedge funds are only loosely regulated, they are not required to report performance or flow data to trackers. All figures, reported on a voluntary basis, are watched closely for clues to trends.

Extending an already established pattern, so-called hedge funds of funds, which aim for safer investing by selecting a number of portfolios, again pulled in the lion’s share of new money.

Data show fund of fund managers, which include Ivy Asset Management and Legg Mason’s (LM.N) Permal unit, pulled in an estimated $9.5 billion, while investors pulled out an estimated $7.1 billion out of their direct hedge fund investments.

Funds specializing in emerging markets pulled in the most money, attracting $4.4 billion in December. The group generated returns of 24 percent for the year.

Merger arbitrage was the least popular fund category, losing an estimated $2.7 billion, or 7.7 percent of assets. These funds had outflows in October, November and December as fewer deals were being done.

Overall, hedge funds took in $257 billion last year, 37 percent more than the $187 billion that went into stock mutual funds. For the year, the most popular categories were multi-strategy, which took in $56.8 billion, and emerging markets, which drew $41.7 billion.

Equity long/short funds, which make up the bulk of the $2 trillion industry, saw $700 million leave.

But 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. (Reporting by Svea Herbst-Bayliss; Editing by Lisa Von Ahn)

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