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Investors hang up on hedge funds

Despite the continuing weakness of equity markets, institutional investment in hedge funds has grown only slowly.

Investors on hold with hedge funds

With equity markets worldwide losing over a fifth of their value last year, bringing further pain and anxiety to institutional and private investors, hedge funds attracted renewed attention and scrutiny. Was this the time for mainstream investors finally to embrace them, or would it be better to harden resistance to their allure?

A sceptical view seemed to have some support - plenty of hedge funds closed down in 2002. At the same time, though, some hedge funds with simple and clearly logical strategies, such as dedicated short-bias equity funds, returned between 15.84% and 18.14%. That compares with -23.37% for the S&P500. Yet the interest shown by institutional investors in such funds has been more cautiously curious than enthusiastic.

In many cases institutional investors met hedge fund managers but left with their money in their pockets. "There's been a lot more talk than action," says Andrew Raisman, associate director for UK institutional business at Baring Asset Management. "For a lot of pension funds it's a case of 'we've got so much else to worry about so why look at hedge funds now?'"

Even after many consultants recommended a 5% to 10% allocation to hedge funds, most institutions left without taking out their wallets except to pay their consultants.

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