BBVA unit says clients slash hedge fund exposure

By Laurence Fletcher

GENEVA (Reuters) - Clients of Spain's BBVA (BBVA.MC: Quote, Profile, Research, Stock Buzz) Patrimonios have cut hedge fund exposure by more than two-thirds over the past year after disappointing returns, says its chief investment officer, who believes the industry is in meltdown.

"Appetite for hedge funds has diminished dramatically," Enrique Marazuela told the Reuters Wealth Management Summit, adding that hedge funds had not met his clients' return and risk expectations.

"The idea customers had about hedge funds was that they were going to have absolute returns and hedge funds controlled the risks."

However, hedge fund returns have disappointed many investors this year in high market volatility.

Hedge Fund Research's HFRI index fell 4.68 percent in September, its second worst month after August 1998's 8.7 percent drop, taking the year-to-date loss to 9.41 percent.

"These are not the returns customers were buying and that's the reason why they are moving away from hedge funds," Marazuela said.

He said part of the problem was explaining to clients the risks involved in buying funds operating in more complex areas, such as asset-backed securities.

"The problem with hedge funds for private clients was that it was very complicated for them to understand the risks," he said.

"Now, after one year, you can explain to them what happened ... (but) when the outcome is not as expected, the immediate reaction is to sell it and they blame you for that loss."

Marazuela said the $2.6 trillion industry was now in major trouble as financial investors cut back their leveraged positions.

"I think it's meltdown right now in the hedge fund industry ...One of the creators of leverage was hedge funds and we're seeing the world deleverage and hedge funds will be affected."

However, he said that in the right proportions, hedge funds could still add value to clients' portfolios because of their balance of risk and returns and the diversification they can offer.

(For summit blog: summitnotebook.reuters.com/)

(Editing by Jason Neely)