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Hedge funds to play bigger role but worries remain

Date: Tuesday, November 17, 2009
Author: Reuters.com

Hedge funds will soon play a bigger role in portfolios, but investors still worry about getting their money back and understanding what a manager is doing, according to a new survey released on Monday.

Nearly 60 percent of all financial advisers who help wealthy people invest their money and institutional investors said they expect hedge funds to be as important to much more important as traditional investments over the next five years.

Currently 34 percent of the financial advisers think that these loosely regulated portfolios will be as important as their traditional cousins, up from 27 percent last year, the survey from research firm Morningstar and magazine Barron's found.

The results come less than one year after the $1.5 trillion hedge fund industry reported its worst-ever losses and investors pulled billions of dollars out of funds as many lost more than half of their capital during the financial crisis.

"Institutions and advisers continue to view alternative investments optimistically, despite their questionable performance, correlation, and liquidity during last year's global downturn as well as the high-profile scandals that rocked the hedge fund industry," said Steve Deutsch, director of the pension, endowment, and foundation database at Morningstar.

Morningstar and Barron's conducted the Web-based survey in late September through early October 2009; 89 institutions and 300 financial advisers participated.

Hedge funds have become very popular for helping investors diversity their portfolios, respondents to the survey said. Indeed 26 percent of institutional advisors said they have put more than one quarter of their money into hedge funds in the wake of the recession.

But investors also worry that they may not get their money back and cite a lack of liquidity at hedge funds as their main reason to stop short of making an investment. This year 61 percent of financial advisers cited it as a top reason to hesitate in making an investment, up from 52 percent in 2008.

Hedge funds tend to lock up investors' money much longer than mutual funds with some holding it as long as two years and many requiring long notice periods of 45 days or more to exit a fund.

Institutional investors also worried a lot about how hedge fund managers really make money with 63 percent saying that a lack of transparency is a top reason not to investor. Last year only 45 percent said the lack of transparency is off-putting. (Reporting by Svea Herbst-Bayliss; Editing Bernard Orr)