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Poll: Hedge funds have high hopes

October 25, 2006|From Reuters

Americans are betting that hedge funds will make them rich even at a time when these once-highflying portfolios are lagging behind the broader market.

Research firm Morningstar Inc. polled 600 advisors in August and found that 65% of them expected more than double-digit growth in alternative investments, which include hedge funds, and that 67% of them reported that more than 10% of their clients were already using alternative investments.

"We were surprised to find that the majority of advisors expect double-digit growth in alternative assets under management every year for the next five years," said Steve Deutsch, director of separate accounts and managed investments at Morningstar.

Loosely regulated hedge funds earned a reputation for delivering huge returns to wealthy investors and pension funds a few years ago. Now, financial advisors who help a broad swath of Americans invest their savings want in too.

About 9,000 hedge funds jointly invest about $1.3 trillion, about twice as much as five years ago. But expectations for high returns might be unrealistic.

This year hedge funds returned about 7% in the first nine months of the year, lagging behind the average stock mutual fund, which is up about 8% and the broader Standard & Poor's stock average, which is up about 12%.

The last time hedge funds delivered double-digit returns was in 2003, when they were up nearly 20%, according to data from Hedge Fund Research. In 2004 and 2005, they returned less than half that, gaining about 9% each year.

Even though hedge funds have captured the public imagination, many financial advisors listed three reasons for staying away: The portfolios are complicated and secretive, and they are expensive.

Hedge funds can use trading techniques that are off-limits at most mutual funds, and most charge performance fees on top of the management fees that most mutual funds charge.

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