Reuters – Millionaires who long put money with hedge funds are now skittish about adding fresh cash after these loosely regulated portfolios posted record losses last year, a top industry executive said on Thursday.

"We have probably seen the worst of the (hedge fund industry redemptions), but I think it will be a slow go to build up that asset base again," Don Heberle, executive director at Bank of New York Mellon Corp’s Wealth Management unit where he oversees the Family Office and Charitable Gift Services groups, said in an interview.

The potential of hedge funds to deliver strong returns in all markets because they can sell stocks short and use borrowed money has appealed to wealthy investors for years. With the help of people like Heberle’s clients — families that are worth more than $100 million — hedge fund industry assets doubled to $2 trillion between 2005 and 2008.

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New York (HedgeCo.Net) – New York-based Harbinger Capital Partners has capped year-end withdrawals from its largest hedge fund after investors moved to pull $3.5 billion of capital. The hedge fund, run by Philip Falcone, will only honor 60 to 70 percent of the requests, according to a report by Bloomberg News.

The Harbinger Capital Partners Master Fund, which manages approximately $10 billion, has never posted a losing year since its launch in 2001. While 2007 saw returns of 115 percent, the fund has lost 23 percent through the end of November, according to the report which cited people familiar with the matter.

Harbinger is just one of dozens of hedge funds who has suspended redemptions this year amidst unfavorable market conditions. Large firms like RAB, Pardus and Citadel are just among a few who have halted withdrawals in hopes of waiting out the storm and avoiding a liquidity crunch.

Harbinger likes to invest in companies either going through mergers or in companies they feel they can strategically change for the better. The firm made headlines when they sought seats on both the New York Times and Media General; two companies in which they invest. They won their board seats after a much publicized proxy battle earlier this year.

Hedge funds as a whole have suffered this year, posting record losses. According to the Credit Suisse/Tremont Hedge Fund Index, hedge funds are down over 19 percent on the year through the end of November. It is estimated that the once $3 trillion industry will manage a mere $1 trillion at the start of the new year.

Julie Scuderi
Senior Editor for HedgeCo.Net
Email: julie@hedgeco.net

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