Hedge funds less profitable for newcomers

By Svea Herbst-Bayliss

BOSTON (Reuters) - Once considered a sure bet for outsized returns, the hedge fund industry may be losing some of its edge now that more investors want in and hundreds of new funds are ready to take their money, portfolio managers said.

"I believe it is going to become more of a bipolar world," with some funds being very successful and able to deliver excellent returns and other who will not, said Mohamed El-Erian, who manages Harvard University's $28 billion endowment and allocates to several hedge funds.

While the $1.2 trillion hedge fund industry beat the broader market with average return of 9 percent last year, the double-digit gains of the 1990s may be gone forever as the industry becomes more crowded which makes it harder to find outstanding investment choices, experts said.

Hedge fund industry assets have doubled in the last five years and the number of funds has ballooned to at least 8,500.

"With this kind of proliferation of funds, all guys can't be great," author, educator and hedge fund manager Joel Greenblatt said, adding "the good will thrive but most won't."

The managers spoke at the Reuters Hedge Funds and Private Equity Summit in New York this week.

This may be especially bitter news for traditionally conservative investors like pension funds which are now turning to hedge funds to try to boost returns quickly as many struggle to meet payment obligations.

A recently released study, prepared by State Street Corp., found that more pension funds and endowments are getting comfortable with these lightly regulated investment vehicles and are planning to sign up more managers in the months ahead.  Continued...