NAPLES, Fla. (HedgeWorld.com)–The end of the second Gulf War did little to encourage further hedge fund investment, according to a recent survey from LJH Global Investments and Reuters.

International investors cut allocations to hedge funds by 14% to US$1.2 billion between April and June and more than doubled the investments in the safest alternative strategies, according to officials. The survey results show a slowdown from the first quarter when US$1.4 billion flowed into hedge funds.

Much of the change in investor attitude might have to do with a more robust U.S. equity market. And according to LJH, the stock market is gathering steam for a double-digit rally, and traditional long-only investments have performed better than their hedge fund counterparts as of late.

For the survey, LJH polled 64 U.S.-based hedge funds, asking them about their domestic and international clients. In the second quarter, investors said they put the bulk of their money, US$714 million, into equity hedge funds, down from US$878.8 million in the previous quarter. But no new assets flowed into convertible arbitrage funds after adding only US$88 million in the first quarter. Short sellers also remained an unpopular choice for the third consecutive quarter, according to LJH and Reuters.

Meanwhile, risk avoidance through diversification was the name of the game with US$212 million going to multi-strategy hedge funds, which offer investors a greater selection of investment styles and spreads risk, according to a statement from officials.

The survey revealed that most of the money going into hedge funds came from institutional investors, who contributed US$480 million compared to US$353 million in the first quarter. Funds of funds topped contributions, adding US$383 million in the second quarter. Pension funds, which had added US$100 million in the first quarter, added only US$19 million in the second quarter, which could be a sign of nervousness, according to LJH.

To most in the hedge fund community, the lackluster inflow to single-strategy funds is not news. Already in the fourth quarter of 2002, TASS* Research reported the first net outflows in two years. The blame was put on the volatility of the stock markets

Previous HedgeWorld Story. In the first quarter, investors seemed to play catch up, though. Asset flows were once again on the rise, with TASS reporting net asset flows of US$6.98 billion into hedge funds

Previous HedgeWorld Story.

*TASS Research is the information and research unit of Tremont Capital Management Inc., Rye, N.Y., which is a minority investor in and strategic partner of HedgeWorld.

SBarreto@HedgeWorld.com