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Hedge Funds Lag S&P 500 in First Half of 2011

Hedge funds, which have already begun reporting second-quarter results, are posting tepid performances as they have been whipsawed by geopolitical and macroeconomic events.

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The Dow Jones Credit Suisse Hedge Fund Index, which tracks 9,000 hedge funds with assets of $50 million or more, indicates that they gained 1.7 percent on average in the first half of 2011.

That's well behind the S&P 500 Index's rise of 6 percent at mid-year, and the broader S&P Composite 1500 Index's 0.2 percent increase.

The Dow Jones Credit Suisse Hedge Fund Index reports that those funds lost 1.4 percent in June, slightly outperforming the 1.7 percent decline for the S&P 500.

Hedge funds invest in a wide array of investments, ranging from precious metals such as silver and gold, to stocks, bonds, international currencies, initial public offerings, futures, options, swaps and derivatives.

Hedge funds' results have been volatile due to the unprecedented international events during the period, including the European sovereign-debt crisis, political unrest in the Middle East, which drove up oil prices, as well as a political quagmire at home:, the unresolved debt-ceiling crisis and Congress' inability to agree on a budget.

According to the Dow Jones/Credit Suisse analysis, a number of factors contributed to the results, "including a downward trend in volatility and the defensive position put on by many managers in an effort to hedge against downside movements resulting from macroeconomic and geopolitical events in the first half of 2011."

Nevertheless, investors poured money into hedge funds earlier this year. The Dow Jones Credit Suisse report said that the industry saw about $33.8 billion in inflows in the first half of 2011. Asset inflows for 2010 totaled $35.6 billion. Still, inflows trickled in the past two months.

In all, industry assets are currently estimated at $1.8 trillion, which is only about $300 billion short of its peak of $2.1 trillion in 2007. Hedge funds held $1.7 trillion at the end of 2010.

The fixed-income-arbitrage investment category saw the biggest inflows this year, at $18.4 billion, followed by the global macro sector, at $14.4 billion and the long/short equity investment class of assets, at $9.0 billion, according to the Dow Jones/Credit Suisse report, which was issued last week.

Large hedge funds, which are those with over $500 million in assets, took in the most new money in the second quarter, at about $12.1 billion, the report said.

The Dow Jones Credit Suisse Hedge Fund Index includes hedge funds with a minimum of $50 million in assets taken out of a database of 9,000 funds tracked by Credit Suisse.

Not all hedge funds had a lackluster second quarter. The world's largest private equity and hedge fund manager, Blackstone Group, reported its second quarter results July 21, which showed a 140 percent increase in revenue. Its hedge fund business contributed $84.5 million of that, up from $63.8 million last year, but down 25 percent from the first quarter's $105.4 million.

Blackstone had a net profit, which it reports as "economic net income," of $703 million in the quarter, up 243 percent from the $205 million profit in the same period last year.

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