Hedge funds losing money but keeping clients

By Svea Herbst-Bayliss - Analysis

NEW YORK (Reuters) - Hedge funds are losing money but that doesn't mean the $1.8 trillion industry is losing clients -- yet.

Pension funds and endowments, whose big bets on hedge funds helped double industry assets in the last five years, are sticking with loosely regulated hedge funds for now, even as returns sag.

But they are also paying extra close attention to who is up and who is down, moving faster than ever in rotating among the industry's estimated 10,000 individual funds and firing losers before they can do real damage to a portfolio.

"Yes, big investors are getting nervous about losses but they are not reducing exposure to the bucket we call alternatives as a whole," said Stephen Moseley, president of private equity firm StepStone Group LLC, at the Reuters Hedge Fund and Private Equity Fund Summit in New York this week. StepStone works with large pension funds.

Jane Buchan, who runs Pacific Alternative Asset Management (PAAMCO), a $10 billion fund of funds that selects hedge funds for pension funds and endowments, agreed. "People may be pulling out of managers but they are not shutting down programs."

The shock of losing big when hedge funds Amaranth Advisors and Sowood Capital collapsed in 2006 and 2007, respectively, raised red flags for fund trustees to more closely monitor hedge funds.

This year their worries are bigger still.

In the first quarter the average hedge fund lost 4.4 percent, according to BarclayHedge, marking the industry's worst first quarter ever.  Continued...