Hedge fund investors want out sooner, not later

BOSTON, June 25 (Reuters) - Worried about hedge funds' low returns and high fees, more well-heeled investors are now talking about getting out of these loosely regulated portfolios than getting into them.

Hundreds of investors have asked for their money back at the end of the month, their lawyers and investment advisors said, noting that June 30 could become a watershed date for the $2 trillion hedge fund industry this year.

"If your hedge fund is in the dog house, you typically give the manager until June, and if you are still not satisfied you get out," said Charles Gradante, who counsels clients on hedge fund investments as a principal at the Hennessee Group.

"June redemptions are for people who were on the fence about their managers," he said.

And this year there seem to be plenty of those.

Even though the average hedge fund is up a smidgen this year and most global stock indices are down, wealthy investors and chief investment officers at pension funds and endowments are still digesting the industry's terrible start to 2008.

RATTLED BY LOSSES

Rattled by news that the average hedge fund lost 3.6 percent in January, the industry's biggest-ever monthly loss, many pension fund trustees began to get nervous and pester their chief investment officers to ask about getting out.

In response to real and imagined redemptions, several hedge fund managers began to take extraordinary steps to try to keep their clients on board. And that sparked even more panic.

"Redemptions come in waves. And we are facing another significant wave right now," said Timothy Mungovan, who advises both hedge fund managers and investors as a partner at law firm Nixon Peabody. "In this market, everyone is nervous," he said, explaining that no one wants to be stuck in a stampede at the door.

Hedge funds often lock up investors' money for years and require 45 days' notice to get out, but this spring some suspended redemptions altogether.

For example, Pardus Capital Management LP and Drake Capital Management LLC told investors they could not get out just yet.

So now, some investors are feeling it is better to be safe than sorry.

For the most part, they are directing their discontent at managers pursuing event-driven strategies and betting on global takeovers at a time when many of these deals are collapsing. These types of funds are off 0.77 percent this year through May, according to Hedge Fund Research.

Investors are also leaving funds hurt by the credit crisis that specialize in convertible arbitrage strategies, which are off 4.47 percent this year, Hedge Fund Research data show.

And high priced funds of funds, which add their own fees on top of hedge funds' individual fees, are also being punished, investors said.

LOW TOLERANCE FOR PAIN

While investors have always made some adjustments to their allocations, the main difference this year seems to be a lower threshold for pain. Now people are getting out even when no disaster looms on the horizon, investors said.

For example, D.B. Zwirn decided in February to liquidate two funds after redemption notices piled up this year even though the funds had delivered double-digit returns last year.

The trend of growing redemptions is already visible in monthly flow data.

Investors once poured so much money into hedge funds that industry assets doubled to $2 trillion in the last three years. Now they are pulling out faster than they have in years.

Two months ago, investors withdrew a net $5.9 billion, marking the industry's biggest outflow in 6-1/2 years, data from TrimTabs Investment Research and BarclayHedge show.

"Redemptions have been very active in the last months and I'm not sure this is the end of it yet," said Jedd Wider, who advises hedge funds as a partner at law firm Morgan Lewis.

LIFE THREATENING

For hedge funds managing assets of less than $250 million, the trend of redemptions may be life-threatening, industry analysts said. More global hedge funds shut their doors in the first quarter of 2008 than a year before as turbulent financial conditions and the slowing economy took their toll, Hedge Fund Research numbers show.

But some investors also contend that the numbers may not paint an entirely accurate picture.

"We could be seeing a lot of rebalancing within fund of funds, where people are getting out of some managers but moving the money to others," Philippe Bonnefoy, chairman of the asset allocation committee at Cedar Partners, said. "Stocks are down, bonds are having a tough time and hedge funds are up a little; where else are you going to put your money?" (Reporting by Svea Herbst-Bayliss, editing by Gerald E. McCormick)