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Hedge funds investors are overwhelmingly happy with their investments in the lightly regulated investment pools, despite indications that average fund results will be underwhelming in June for the third consecutive month.

Conservative institutional investors such as pension funds continue to pour money into hedge funds, suggesting that the much scrutinized $800 billion industry is successfully recasting itself as a haven from bear markets, rather than an arena for dramatic gains from speculative bets.

To get larger sums of money to manage, Wall Street's cowboys have traded in their pickups for minivans, and the image makeover seems to have worked. In 2003 alone, hedge fund assets under management grew from $592 million to $795 billion, a 34% increase, according to the Hennessee Group, a New York investment advisor that creates custom portfolios of hedge funds.

At the same time,

Securities and Exchange Commission

Chairman William Donaldson has cited pension fund investment as one reason the agency should increase its oversight of the approximately 6,800 hedge funds now operating in the U.S. The commission is scheduled to consider the oversight measure at its July 14 meeting.

The Hennessee survey also reported that 88% of hedge fund investors said their investments "met or exceeded expectations" and that 62% of the endowments that invest in them will be increasing their capital. Since hedge funds generally require individual investors to invest a minimum of $1 million -- for most institutions, it's $5 million -- that's serious money.

Leon Metzger, vice chairman of Paloma Partners, a Greenwich, Conn., hedge fund, said the arrival of pension fund represents a logical progression.

"In the '90s, the stock market was doing very well, and investments there generally did better than the payout rates of pension plans," he said. "Once the market tanked, pension plan trustees had to be concerned -- if you were paying out 8%, you had to be earning 8%. Therefore, significantly more pension plans started paying attention to these alternative investments."

But many industry observers expect June will be a lackluster month for the indices that provide the best indication of how hedge funds are performing. The Credit Suisse First Boston/Tass Tremont index suffered its first loss in 17 months in April, dropping 0.58%. That was followed by an average loss of 0.23% in May. Nevertheless, it's still up 2.58% through the end of May.

"There has been very low

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market volatility," Metzger said. "Low volatility does not help strategies like convertible arbitrage or statistical arbitrage." With the benchmark

S&P 500

index down 0.5% for the year to date, the absence of wide market swings hasn't provided much lift for long-short equity funds, which tend to have a higher correlation to the stock market than other hedge fund strategies.

David Kabiller, a partner at AQR Capital Management, says investors have matured along with the hedge fund market. While he thinks June results will be "flattish or down," he says investors are now looking to hedge funds more to preserve capital than to garner stratospheric returns. Hedge funds have responded, and are touting their risk management virtues the way a salesman pushes the safety of a Volvo sedan, rather than the flash of a Ferrari.

"U.S. equity markets have delivered negative returns over multiple years, and we're still comfortable with that from a long-term point of view," Kabiller said. "When you start looking at investment horizons on a monthly or quarterly basis, the investor who does that can get whipsawed."

But a recent report by Merrill Lynch says that funds of hedge funds -- the main choice of first-time investors -- fail to deliver the best possible returns.

Hedge funds are expensive by any measure. Most charge a 2% annual management fee and take 20% of any profits, while funds of funds -- which spread risk around by investing in a basket of single-manager funds -- add another 1% to 1.5% fee on top of that. Some funds of funds also charge incentive fees as high as 10%, making them a costly proposition.

The Merrill report says that cuts too far into investors' potential alpha -- the measure of a fund's average performance independent of the market. While light regulation makes it hard to know how much money has made its way to hedge funds through funds of funds, the consulting group Van Hedge Fund Advisors International said the average compound annual return for a single-strategy hedge fund was 17.8% between 1988 and 2003, while funds of funds had an average return of only 11.8% during the period.

"Funds of funds fail to show significant alphas in any period reflecting either the burden of the double fee structure or the difficulty in putting together a portfolio of hedge funds that shows persistent positive performance over time, or both reasons simultaneously," the report said.

George Van, founder of Van Hedge, said most investors are aware of the double fees and accept that as the price of venturing into a new asset class. A bigger hurdle is that while fund of funds managers may know which single-strategy funds enjoy good reputations, past performance can never guarantee future results.

"It seems intuitively easy to put together a diverse portfolio of hedge fund and have it perform well over time, but in fact it's difficult," he said. "There is no choice but to use history as a strong indicator of a fund's performance."