Hedge fund returns are up, redemptions down

BOSTON/LONDON (Reuters) - Hedge funds are living up to their high-flying reputation again with strong returns in the last three months, but many investors burned by last year’s losses are clamoring for reforms before committing new money.

Final June quarter data will not be released until next week, but Merrill Lynch analysts who track returns in the $1.3 trillion industry wrote on Monday that hedge funds will likely post their best quarterly performance since early 2000.

The rebound became visible in April when the average hedge fund returned 2.7 percent. It gained strength in May with a 4.4 percent rise, Merrill Lynch analysts wrote. For the second quarter, they estimate a gain of 6 percent or more.

That would mark a dramatic recovery from 2008 when the average hedge fund lost 19 percent and some celebrated funds, including Citadel Investment Group LLC -- run by Kenneth Griffin, the 41-year-old Chicago billionaire -- lost as much as 50 percent at the height of the financial crisis.

This year’s stock rally, sparked by hopes that the worst of the global economic downturn is over, has helped boost many funds’ returns.

Tudor BVI Global Fund, run by Paul Tudor Jones of Tudor Investment Corp, gained 12.4 percent through the end of May, while Lee Ainslie’s Maverick Fund gained 8.8 percent through the end of May, their investors said.

“I believe there’s been a very big change of mood and it has come at least three months earlier than I was expecting,” said Christopher Fawcett, chief executive of hedge fund firm Fauchier Partners in London.

Last year, pension funds, endowments and wealthy individuals reacted to hedge funds’ heavy losses and high fees by demanding a record $152 billion back in the last three months of 2008, research firm Hedge Fund Research (HFR) said.

This year, the pace of redemptions has slowed. In the first quarter, investors pulled $103 billion, according to HFR. In May, hedge funds saw inflows of $3.4 billion, their first inflows since May last year, researchers at TrimTabs found.

“Redemptions have really dried up,” said Mark Kary, chief executive of hedge fund firm Polar Capital in London, noting that his firm also saw small net inflows in the second quarter.

While inflows are still small, industry researchers said they played a critical role by letting hedge funds stop selling market positions to raise cash needed to let investors out.

“The inflows kept hedge funds from being a drain on the markets,” TrimTabs President Conrad Gann said.

Pension funds and other investors have said they plan to commit more money to hedge funds in the second half of 2009, but they are also ready to attach conditions about how their money will be invested and a right to get it back fast.

“Transparency, liquidity, good fee terms, no gates, no side pockets. That is what the institutional community will be pressing hedge funds for,” said Eric Goodbar, hedge fund strategist at Mellon Capital Management, a unit of Bank of New York Mellon Corp. “Hedge funds that are essentially large lockup structures will be viewed with caution.”

Reporting by Svea Herbst-Bayliss, editing by Matthew Lewis