Hedge Funds

Hedge fund investors dumping small funds-

ZURICH (Reuters) - Hedge fund investors pulled $11 billion from hedge funds in the first quarter of 2010, reversing fourth quarter inflows, with investors taking profits or selling off less liquid strategies as the Greek debt crisis loomed.

Lipper data released on Friday show investors dumped smaller funds in the quarter, with many reallocating their cash to larger fund managers whom they perceived as safer in light of a shaky macroeconomic backdrop.

“Investors filed redemptions at the beginning of the quarter to cash in profits and rebalance their portfolios,” said Lipper head of hedge fund research Aureliano Gentilini.

“The reversal in money flows also likely indicates a polarisation among hedge funds -- the larger ones were able to post consistent new money inflows, while the smaller funds generally had outflows,” he said.

The first quarter withdrawals bring total investor money pulled from hedge funds over the past year to over $55 billion, Lipper data said.

In spite of the net withdrawals, total industry assets rose 2.6 percent in the quarter to $1.39 trillion as positive performance increased the value of most hedge funds’ holdings.

Multi-strategy funds, which combine strategies to smooth returns and offer diversification to investors in a single fund, had the biggest outflows at $11.8 billion, nearly double the withdrawals for the strategy in the fourth quarter of 2009.

“Multistrategy funds were impacted by the fund of funds segment, one of the key allocators to that strategy, which is shrinking progressively,” said Gentilini.

“Also, institutional portfolios are redirecting investments to managed accounts and Ucits-compliant funds which are probably crowding out the segment. We expect multi-strategy outflows to probably continue this year, although they will taper off.”

Institutional investors are increasingly keen on Ucits-III compliant hedge funds, which are regulated and impose strict liquidity requirements and leverage limits, and on managed accounts which give investors more control over their assets.

While most withdrawals came from illiquid strategies as investors sought to ensure they could turn round their portfolios swiftly in the event of market turmoil, investors also pulled $5 billion from managed futures, which uses the most liquid indexes and futures to bet on market direction.

“Investors sold off these funds because overall they had heavy negative returns in January and only modest returns in February. They didn’t prove effective in returning a performance that is uncorrelated to the broader markets,” said Gentilini.

Editing by David Cowell