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Hedge Fund Returns Fall in March

For the first time in a year, the average fund lost ground.

Hedge funds took in a hefty $22 billion in the first three months of 2004, a bit less than the previous quarter but an indication that choppy markets are still driving money into alternative investments at a healthy clip.

The first-quarter inflows reported by Hedge Fund Research, a Chicago consulting group, were released just ahead of preliminary data showing the average hedge fund lost 0.8% in March, the first monthly loss in over a year. Early reports by Van Hedge Fund Advisors International, a Nashville, Tenn., investment adviser, said hedge funds were able to blunt the losses seen on the benchmark

S&P 500

, which was down 1.6% for the month, and the

Nasdaq's

3.7% drop for the same period.

"Even though it's the first drop since February 2003, it wasn't much of a drop," said John Van, the company's CFO. "Even though they are absolute return vehicles, there's no guarantee that every single month they're going to make money.

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The average hedge fund returned about 15.44% for 2003, about half the S&P 500's 28.68%, but those results -- and the preliminary numbers from Van -- are subject to some debate within the industry, which is largely unregulated and relies on funds to voluntarily report results to a number of different indexes. Even the size of the industry is only an estimate -- which now stands at $750 billion. There are thought to be about 8,600 hedge funds worldwide, with about 6,800 in the U.S.

The same is largely true for the inflow numbers. Hedge funds took in about $75 billion last year, according to Hedge Fund Research, but only about $72.2 billion by the reckoning of Tass Research, a unit of

Tremont Capital Management

, a Rye, N.Y., investment firm. Tass has not yet released its figures for the quarter.

But money will keep coming, says Leon Metzger, vice chairman of Paloma Partners, a hedge fund in Greenwich, Conn.

"Every time the U.S. markets go down, even if it's just in the short term, usually it brings in more money to hedge funds," he said. "Because hedge funds can make money in down markets."

Van said U.S. pension funds were showing more interest as their concerns about hedge fund risk were allayed, and with 2% to 5% of a potential $3 trillion market, "even a small amount is a large amount for hedge funds," he said.

Hedge Fund Research said emerging market funds saw a $1.2 billion, or 9.42%, increase in new money, while investors took $25 million out of short-selling funds, a 2.6% decrease. Macro funds, merger arbitrage funds and conventional equity-based funds, which make up more than half the U.S. hedge fund market, also saw sizably increased investment.