Hedge funds: handle with care

Watson Wyatt consultants explains why investors should take a wary approach to investing in hedge funds.

Sharp falls in the world's major markets have encouraged investors to diversify out of mainstream assets into hedge funds. Despite returns on these vehicles being far off their historic highs, money continues to flood into an ever-growing number of funds as pessimism grows about the prospects for returns from traditional bond and equity investments.

By all accounts, 2001 was a record year for hedge funds, with the highest estimate putting growth at $140 billion including capital appreciation. More than this is expected to pour into the industry this year. European hedge fund assets alone have quadrupled to more than $60 billion in the past three years. Most accepted figures now estimate total industry assets to...

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