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Hedge Funds Rake In Assets

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From Reuters

Investors last year sent more money into hedge funds than ever before, but industry analysts and investors expect the pace to slow as potential clients think twice about paying super high fees for meager returns.

For the second year in a row, these loosely regulated investment vehicles reported a record in new assets, adding $123 billion in 2004 after pulling in $72.2 billion in 2003, according to data released by TASS Research on Thursday.

The pace of demand -- driven largely by pension funds, college endowments and charities -- started to slow, however, as investors saw returns sag. And some investors are warning others to stay away this year, saying the best times are over.

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For example, in the fourth quarter of 2004, when performance finally improved, investors added only $16.3 billion in new funds. They had added $38.2 billion in the first quarter, $43.3 billion in the second and $25.1 billion in the third. Hedge funds pulled in $26.8 billion in the fourth quarter of 2003.

“With volatility at historic lows, investors are focusing mainly on returns allocated more to the equity markets and that would explain the tapering off in flows late last year,” said Stephen Jupp, Tremont’s director of quantitative research.

This year, demand probably will fall off more as investment committees face hedge funds’ high and often rising fees and returns that are far below even the 20% they returned in 2003. In January, the average hedge fund lost 0.34%.

“For the huge pension funds out there, I think it is silly to invest in hedge funds,” Ellen Shuman, chief investment officer of Carnegie Corp., told managers and investors at an industry conference.

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