US hedge funds' gains meager in 1st quarter

Hedge funds made little if any money in the first three months of the year, extending a period of low returns at these high-cost investment funds that have become a ''must have" addition to many portfolios.

''This quarter has been difficult," said Justin Dew, hedge fund analyst at research and index firm Standard & Poor's. ''Our index is down about 50 basis points for the year to date," he said, referring to data on hedge funds' returns.

Official results on how the loosely regulated industry fared won't be tabulated for a few days -- the first performance numbers are expected April 8 -- but investors and managers agree the year got off to an uncertain start.

Uncertainty in the credit markets -- triggered by General Motors Corp.'s recent profit warning as well as by worries about how fast and how far the US Federal Reserve may raise interest rates -- has hurt many hedge fund strategies and weighed on overall performance.

As credit spreads have widened recently, investing in convertible arbitrage or fixed-income arbitrage hedge funds has become more difficult, with many managers reporting losses in the last few weeks, investors said.

Things got even worse this week when the bonds issued by American International Group Inc. dropped in value amid an expanding investigation into accounting practices at the insurer.

Similarly, hedge funds that specialize in emerging markets likely lost money as well, investors who have tracked the numbers said.

''Everything we have heard about performance in March suggests that a lot of hedge funds lost money this month," said Kevin Campbell, vice president of research at Van Hedge Funds Advisors.

In March, the average hedge fund likely lost 1 percent, Campbell said.

For the loosely regulated $1 trillion industry, a weak first quarter will follow last year's disappointing results when hedge funds faced a lack of trends for most of the year and underperformed the broader market.

Traditionally hedge funds have charged investors 20 percent of annual profits in return for promises to make money in all markets and protect their clients against the sort of losses many suffered during the bear market.

So after lagging the broader market last year, industry analysts note that hedge funds' soft returns are still beating the even softer returns in the broader stock market.

Hedge funds' lackluster showing this year, however, hasn't scared off investors such as pension funds that are still looking to get into the secretive and fast-growing industry.

''The flows continued to be positive through January and February despite the ups and downs of the quarter," said Joshua Rosenberg, president of database group Hedge Fund Research.

Data for March aren't available yet, he said.

And some investors and managers expect flows to remain strong even if returns don't pick up.

''There seems to be a type of lemming philosophy with investors," said hedge fund manager Lawrence Goldfarb, whose BayStar Capital manages roughly $800 million. ''Hedge fund managers are taking in more and more money for less and less returns."