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Investors see hedge funds as less important-poll

Date: Tuesday, November 11, 2008
Author: Thomson Reuters.com

The days of hedge funds as a red-hot asset class may be cooling, according to a new survey released by fund research firm Morningstar on Monday.

Nearly half of all financial advisers who help wealthy people invest their money said they expect hedge funds to become somewhat less or much less important in clients' portfolios in the next five years. Among institutional clients like pension funds, 37 percent of those polled said they expect hedge funds to become somewhat less or much less important.

Wealthy investors and pension funds helped hedge fund industry assets double to $1.7 trillion in the last three years, but recently the loosely regulated portfolios have disappointed investors with their worst-ever returns.

With the average hedge fund down roughly 20 percent this year, investors have pulled billions of dollars out of hedge funds, data from Hedge Fund Research show.

Still hedge funds are expected to play a role in investors' portfolios in the years ahead.

One-quarter of the financial advisers polled said they expect loosely regulated hedge funds to become somewhat or much more important. Among institutions, 30 percent said hedge funds would be somewhat or much more important.

"People want the best of both worlds," said Steve Deutsch, director of separate accounts and collective investment trusts at Morningstar, referring to hedge funds and traditional investments like stocks, bonds and mutual funds.

Morningstar worked with business and finance magazine Barron's and polled 252 institutions and 1,180 financial advisers between late September and early October.

Financial advisers and institutional investors said they worry about getting their money out of hedge funds, with more than half listing the lack of liquidity as a top reason to hesitate in selecting hedge funds.

Hedge funds, unlike mutual funds, often lock money up for months or even years.

Advisers and institutional investors also expressed a concern about hedge funds' lack of transparency and high fees where investors pay both a management fee and performance fee. (Reporting by Svea Herbst-Bayliss; Editing by Steve Orlofsky)