Hedge Funds Are Still A Draw

Date: Thursday, October 25, 2007
Author: LA Times

Investors put significantly less money into U.S. hedge funds in the third quarter, when credit market woes sparked heavy losses at many prominent portfolios. But demand did not dry up, as some analysts had predicted.

Pension funds, endowments and wealthy private investors added a net $45.2 billion to hedge funds in July, August and September, bringing the total assets under management in the loosely regulated industry to $1.8 trillion, data tracker Hedge Fund Research said Tuesday.

The net inflow was down from $58.6 billion in the second quarter and $60.2 billion in the first quarter. But analysts said the inflow was still sizable, suggesting the hedge fund industry remains popular with many investors.

Unnerved by heavy losses at funds operated by AQR Capital Management, Highbridge Capital Management, D.E. Shaw and Goldman, Sachs & Co., some investors signaled plans to rush for the exits in August.

During the third quarter, the average hedge fund posted a return of only 1.36%, down from 5.04% in the second quarter.

After trouble with U.S. sub-prime mortgages spilled into credit markets and pushed stocks lower, some analysts speculated that redemptions might leave the industry with its first quarterly outflows since the fourth quarter of 2005.

One reason outflows didn't materialize is that pension funds and endowments make long-term investing decisions and tend to react less to momentary weakness.

But investors allocated their money more cautiously, analysts said.