Hedge funds deny having too much of a good thing

By Tom Burroughes

LONDON (Reuters) - Hedge fund industry figures dispute the idea that a flood of money into the sector from pension plans and other clients is cutting overall returns by overcrowding the market, saying recent economic conditions are the main culprit.

These free-wheeling portfolios can use techniques like short selling -- betting that a price will fall -- to make money in all markets, a tactic that found particular favor when the dot-com boom in stocks ended in 2000.

Led by big institutions in the United States, retirement schemes, college endowments and charities piled into hedge funds, taking total assets under management above $1 trillion, and this is expected to surpass $2 trillion in the next decade.

But some commentators fear the growing popularity of hedge funds is dragging returns down.

"I don't buy it. If the returns have not been as good as expected, it is more to do with the global situation rather than just an influx into the industry," Nils Tuchschmid, head of multi-manager portfolios at Credit Suisse, told the Reuters Hedge Fund and Private Equity summit this week.

"It is more to do with risk premia, which are very low, than inflows coming into the industry."

Performance has hit headwinds in the past two years. Between 2000 and 2002, hedge funds on average returned more than 3 percent, while the MSCI index of world stocks .MSCIWD lost more than 10 percent. But since then, hedge funds on average failed to beat it.

The influx of money to hedge funds has been rapid. In 2000, these vehicles had assets just under $500 billion, rising to $1 trillion last year, according to industry estimates.  Continued...