January 25, 2006 (PLANSPONSOR.com) – With a wary eye cast at what many saw as skimpy returns, many investors fled from hedge funds in 2005 and took hundreds of million of dollars with them.
Data released by Chicago-based Hedge Fund Research Inc. (HFR) found that wealthy individuals, pension funds, and endowments took $824 million out of hedge funds in the last three months of 2005, Reuters reported. It was the first time in more than a decade that assets fell during a quarter.

“The data show that in this mixed performance environment, there has been a slowdown in flows especially in the fourth quarter,” said Joshua Rosenberg, president of HFR in the news report.

While the $1.1-trillion hedge fund industry saw assets double in the last five years as managers promised strong returns in all market conditions, demand has tapered off now that returns are roughly half of what they were 10 years ago. The average hedge fund returned about 9% last year, compared to average annual returns of 16% in the 1990s.

In the fourth quarter, investors became especially impatient with so-called funds of funds. Funds of funds, which manage roughly one third of all hedge fund assets, saw net outflows of $2.1 billion in the fourth quarter after net outflows of $1.2 billion in the prior three-month period, HFR data show. Over the year, funds of funds pulled in $9.5 billion in net new assets, compared with $33 billion in 2004 and $59.4 billion in 2003, according to the data.

Hedge fund managers who concentrate on convertible arbitrage strategies saw outflows of $7.7 billion last year as assets in the segment shrunk to $36.7 billion. The money that left this area may have been moved into more conventional strategies like equity hedge, which with $332 billion, is the biggest single strategy in the industry. These types of funds pulled in $13.65 billion last year, HFR data show.

For the industry, assets flows also slowed, with HFR reporting that investors added $47 billion last year after adding $73 billion in 2004 and $70 billion in 2003.

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