Hedge funds see their returns halving in 2014

Hedge Fund

Hedge fund managers are expecting to deliver less than half of the returns for their investors in 2014 that they saw last year, as fears of a correction in stock markets mount, amid record high equity valuations.

Almost half of the 150 hedge fund managers questioned by data provider Preqin, with a total of $380 billion of assets under management, said they expected to deliver returns of 5 percent or less in 2014.

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Some 66 percent of the managers surveyed expected to see 6 percent full year returns or less.

Last year, hedge funds made gains of 11 percent on average for the 12 month period ending December 2013, according to Preqin, beating the 10 percent average gains seen in 2012.

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Equities have had a solid first half this year, with stocks climbing consistently to record highs and the S&P 500 and Nasdaq up 7 percent and 6 percent year-to-date respectively.

Japan is the only developed market that lagged in the first half, with the Nikkei 225 off 6 percent year-to-date.

Federal Reserve Chair Janet and her fellow Fed policymakers raised concerns about "substantially stretched valuations" in some sectors in the monetary policy report that accompanied Yellen's congressional testimony last week.

Equity allocations hit their second-highest level in 13 years this month, with some 61 percent of investors now overweight stocks, according to Bank of America Merrill Lynch global fund management report for July.

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The bank said fund managers' allocations to stocks are looking "stretched", and could be followed by an autumn correction, with equities more pricey than at any other time since May 2000.

Earlier this month, billionaire activist investor Carl Icahn also warned investors they should tread carefully, after the run-up in U.S. stocks.

-By CNBC's Jenny Cosgrave: Follow her on Twitter @jenny_cosgrave

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