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Hedge funds' redeeming features

May's credit market turmoil hit the profits of all four US brokers that reported second-quarter earnings last month, Goldman Sachs and Morgan Stanley especially. There'll be more to come in July when the universal banks, and Merrill Lynch, report.  JPMorgan has already warned that its trading results are the worst for some time. But the firm has at least had the chance to offset some of its problems with gains from June's more bullish credit trading environment.

The brokers have no such luck. Nor do the hedge funds, and that has fuelled talk of their investors withdrawing money in significant amounts.

It might not come to that; if funds have made better returns in late May and June there is a chance some investors will cancel their redemptions.

But the problem hedge funds face is precisely that they are increasingly dependent on fearful, trigger-happy pension funds, mutual funds and insurance companies. These traditionally long-only, buy-and-hold investors are becoming the new hot money, on the lookout for high returns but quick to pull out at the first sign of problems.

The rapid growth in hedge fund assets in the past five years is in large part a response to the demand for higher returns from such traditional investors after the equity market collapse hit their performance figures.

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