Hedge Funds Not All They're Cracked Up to Be

Some portfolio managers who left mutual funds in recent years to run hedge funds are returning to their roots, the Financial Times reports.

Lured by the chance to invest any way they want, not to mention hedge funds' lucrative fees and loose regulation, some skippers have become disillusioned by the instability of hedge funds. They've also found it difficult to exploit market inefficiencies to deliver stellar returns in a sector becoming increasingly crowded day by day. In fact, according to data from Hedge Fund Research, hedge funds are up about 5.7% so far this year, compared to an average 19.5% return in 2003.

"You need to put up spectacular numbers to really grow the business," one hedge fund manager said. "My numbers were good, but they weren't spectacular."

"Suddenly, the comfort and stability that running a mutual fund offers seems much more appealing than the unstable environment of a hedge fund - particularly since achieving outsized gains is no longer as likely," agreed Burton Greenwald, president of B.J. Greenwald Associates.

Those who have come full circle in recent months include Brian Posner, who is now with Legg Mason after two years of running his own hedge fund, and J. Fergus Shiel, who has returned to Fidelity Investments, also after two years of striking out on his own. After running a hedge fund for Altura Asset Management, Jayne Stevlingson is now with Gartmore.