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Hedge Funds Estimated 2006 Returns Are Trimmed: GAIM Survey

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CANNES, France (–Hedge funds have scaled back their expected returns for the year following large losses in May and June, a survey of delegates at the GAIM conference showed.

The survey by conference organizers ICBI showed that less than one in ten of those who responded expected average hedge fund returns to be more than 9.5% in 2006. That is below the 12-15% many were expecting in April after a strong first quarter when the average gain was already around 7.5%.

Last year the average return was around 7.5% and in 2004 the figure was around 9.5%. Worries about rising inflation, higher interest rates and a global economic slowdown punctured sentiment in May; stock prices fell and markets have since been volatile.

“There is a small chance we could see a pick-up,” one hedge fund manager told Reuters. “But it’s unlikely because so much of the money is in long/short equity.” These funds normally have more long positions than short, and some 30-40% of their returns come from stock prices trending higher. Long/short funds account for over 30% of the $1.5 trillion estimated to be invested in hedge funds.

Long/short funds lost around 1.5% in May and are expected to have lost about 1% in June. That would leave them up around 5.5% for the year ending in June.

“Emerging long/short will be the worst performer, but it won’t affect the average so much,” one investor said. These funds, mostly in Asian stock markets, accounted for around 6% of the industry’s assets last year.

They lost more than 5% in May and are estimated to be down another 2-3% in June, leaving them up about 5-5.5% so far this year. Most of their returns come from long-only bets.

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Contact Bob Keane with questions or comments at [email protected].