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Hedge funds gain in August but lag broader market

Date: Wednesday, September 9, 2009
Author: Svea Herbst-Bayliss, Reuters

* Hedge funds return 1.85 percent in August

* Investors pulled $20 billion out of hedge funds in July (Adds data from Hedge Fund Research, flow data)

Hedge fund returns rose for the sixth straight month in August putting the $1.4 trillion industry on track to record its best year in a decade, according to data released on Tuesday.

But the loosely regulated, global funds also underperformed the broader U.S. stock market, where hopes of a quick economic recovery fueled strong gains last month.

The average hedge fund rose 1.85 percent last month while the Standard & Poor's 500 index gained 3.36 percent, the Hennessee Group reported. Hedge Fund Research said the average fund returned 1.65 percent last month.

"Hedge funds continued to lag the surging equity markets as we would expect given their short portfolios and hedges," Lee Hennessee, one of the consulting group's managing principals, said in a statement.

August's stronger returns -- following on the heels of a 3.11 percent increase in July -- signal that the $1.4 trillion hedge fund industry is recovering ground less than one year after suffering its worst-ever losses.

"The overall hedge fund industry is currently on pace for the best year since gaining 31.3 percent in 1999; this following the worst calendar year for hedge fund performance in 2008," researchers at HFR wrote.

Still, investors were somewhat skittish about leaving their money with hedge funds according to recent data showing that clients pulled nearly three times as much money away from funds in July than in June.

Hedge fund managers are not required to report their returns and so investors and industry analysts keep a close eye on reports from the Hennessee Group, HFR and others that track performance to keep tabs on how the industry is performing.

Since January, the average hedge fund has gained 17.30 percent, the Hennessee Group reported while HFR puts the year-to-date gains at 14 percent. During the same time the S&P 500 gained 12.99 percent.

Managers who bet on emerging markets and financial stocks plus media and telecommunications offerings last month scored the largest gains and helped boost the overall index.

So-called short sellers who bet exclusively that stock prices will fall lost 1.23 percent in August, leaving them as the industry's biggest losers this year, with a year-to-date loss of 11.47 percent.

Despite strong returns this year, investors have continued to withdraw money from hedge funds this summer after having removed a record $152 billion in the last quarter of 2008.

In July, clients redeemed $20 billion from hedge funds that allow investors to get out either once a quarter or once every six months. In June they withdrew $6.9 billion, according to data from BarclayHedge, which is compiled by research firm TrimTabs Investment Research.

"That is a huge number," TrimTabs analyst Vincent Deluard said, explaining that investors may finally be getting back the money they asked for late last year when fund managers prohibited many clients from exiting.

In August, clients reversed course slightly by adding $8.3 billion, he said.