Markets / INVESTING - Exits barred at some funds - Hedge managers' limits on withdrawals amid market turbulence could hurt investor confidence.

Temporarily barring withdrawals, though legal, also could damage the image of the hedge fund industry, which in recent years has attracted hordes of well-heeled investors seeking high returns. The industry has mushroomed to 9,700 funds with $1.7 trillion in assets.

"Psychologically, separating people from their money is generally considered to be a hostile way to behave," said Ron Geff- ner, a partner at New York law firm Sadis & Goldberg.

Fund managers say that withdrawal limits protect their investors by preventing sales of securities at deeply depressed prices. But some analysts say news of unexpected hedge fund suspensions could prompt nervous investors in other funds to demand their money back, fearing that the exit door could slam shut on them in the next few months should stock and bond market losses deepen.

Such a run-on-the-bank scenario also could hurt investors who have no money in hedge funds because forced asset sales could drive markets overall lower.

Brokerage Bear Stearns Cos., which last month shut down two hedge funds that owned mortgage-backed bonds, has told investors in a third fund that it will keep the $900-million portfolio going -- but investors won't be able to cash out for the time being, a spokeswoman confirmed Wednesday.

An Australian hedge fund manager, Absolute Capital Ltd., last week told investors in two of its debt-focused funds that it had barred the door to withdrawals until Oct. 25.

Given the "general lack of liquidity" in certain securities, "a temporary closure of the funds is the best defensive measure to protect the longer-term interests of our investors," Absolute Capital said in a statement.

The decisions highlight a key difference between hedge funds, which are largely unregulated portfolios for big-money investors, and conventional mutual funds used by average investors: Mutual funds by law must be willing to honor redemption requests in full as soon as they are received.

Hedge funds, by contrast, typically can fully or partly limit investors' right to flee, both in terms of dollar amounts and by restricting redemptions to specific dates.