Hedge funds may finally be losing their sex appeal

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A small but growing number of investors believe these once-free spirited portfolios, viewed as the cutting edge of finance for most of the past decade, have become too conservative and boring.

Large and cautious pension fund and endowment clients are increasingly calling the shots in the industry, and investors such as funds of funds and rich individuals need to take matters into their own hands if they want higher returns.

"Some managers ... over the past two years have become too dull and the probability that they will become dead wood in the portfolio is too high," said Morten Spenner, chief executive of funds of hedge funds firm International Asset Management IAM.L.

Managers made 10.2 percent last year, according to Hennessee Group, lagging behind the S&P's .SPX 12.8 percent gain and 17.5 percent at the average stock mutual fund...

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