March 5 (Bloomberg) -- JPMorgan Chase & Co. overtook Goldman Sachs Group Inc. to become the largest U.S. hedge-fund manager, according to a new survey, as its flagship fund gained almost 25 percent while Goldman's fell for the first time in seven years.

Hedge-fund assets at New York-based JPMorgan soared 74 percent to $34 billion last year, according to a release from Absolute Return magazine. That includes $20 billion at Highbridge Capital Management LLC, whose assets have almost tripled since JPMorgan acquired the firm in 2004. Goldman's hedge-fund assets rose 48 percent to $32.5 billion.

The firms, along with Bridgewater Associates Inc., are the only U.S. hedge-fund managers with more than $30 billion of assets, and combined they hold 7 percent of the industry's $1.4 trillion in client funds globally. Institutions such as pension funds and endowments gravitate toward funds with track records, allowing them to grab a larger share of fees.

``By sheer numbers, the institutional investors have the money,'' Matthew Zorn, senior hedge-fund analyst with Commerzbank AG in New York, said today in an interview. ``To sell to a pension fund, you need a CFO; you need a disaster- recovery plan; you need staff and infrastructure. Investors say they want to take risks, but they really don't.''

The 20 largest U.S. hedge-fund managers controlled $386 billion, according to Absolute Return, which is published by London-based Hedge Fund Intelligence. Hedge funds typically charge fees of 2 percent of assets under management and 20 percent of any profits. Based on that average, the industry's management fees alone are about $28 billion.

`Marginal' Funds Squeezed

Highbridge Capital's $10 billion flagship fund returned 24.7 percent in 2006. That beat the fund's average annual advance of 15.5 percent since it was founded by Glenn Dubin and Henry Swieca in 1992.

``The best guys continue to outperform the average hedge fund and take a disproportionate share of the assets,'' Joe DeLuca, 38, Highbridge's head of product strategy and a former hedge-fund manager at Goldman, said today in an interview. ``You see marginal players get flushed out.''

Highbridge earned a reputation in the 1990s for its arbitrage strategies that use computer models to take advantage of price differences in equities and bonds. The firm later developed a multistrategy approach, investing in everything from Asian derivatives to stocks of companies going through mergers.

Global Alpha Stumbles

Areas of growth in 2006 included the multistrategy fund, statistical arbitrage and strategies concentrated on Asian equities and equity derivatives, DeLuca said.

Goldman's $10 billion Global Alpha Fund, managed by Mark Carhart and Raymond Iwanowski, dropped 6 percent in 2006, compared with an almost 40 percent gain a year earlier, investors said. The fund generated about $700 million in fees in the fiscal year ended in June, they said. Goldman spokeswoman Andrea Raphael declined to comment.

Assets controlled by the 241 U.S. hedge funds managing at least $1 billion rose 41 percent in 2006, the Absolute Return's survey showed. Seventy-six firms managed $5 billion or more.

Hedge funds globally raised a record $126.5 billion last year, more than double the amount in 2005, according to Chicago- based Hedge Fund Research Inc. Inflows plunged 64 percent in the fourth quarter from the record pace of the previous three months.

Fund Inflows Slow

The amount of money raised by new U.S. hedge funds declined for the second straight year in 2006, according to a separate survey last month by Absolute Return. The 86 largest new hedge funds gathered $31 billion, compared with 82 funds that netted $34 billion in 2005.

Flows into new hedge funds were hurt late in the year by the September collapse of Greenwich, Connecticut-based Amaranth Advisors LLC, Absolute Return said. Amaranth lost $6.6 billion on bad natural-gas bets, the biggest loss ever by a hedge fund.

Hedge funds globally returned an average of 13 percent last year, according to Hedge Fund Research. That lagged behind the 16 percent gain in the Standard & Poor's 500 Index of the largest U.S. stocks and the 21 percent increase in the MSCI World Index.

U.S. institutional investors including pension funds allocated 2.1 percent of their estimated $7.2 trillion in combined assets to hedge funds in 2006, compared with 1.9 percent of $6.5 trillion in 2005, according to Greenwich, Connecticut-based consulting firm Greenwich Associates.

Below is a chart listing the 10 largest hedge-fund managers as ranked by Absolute Return:

Firm                                         AUM

JPMorgan Asset Management                    $34 billion
Goldman Sachs Asset Management               $32.5 billion
Bridgewater Associates                       $30.2 billion
D. E. Shaw Group                             $26.3 billion
Farallon Capital Management                  $26.2 billion
Renaissance Technologies Corp.               $24 billion
Och-Ziff Capital Management                  $21 billion
Cerberus Capital Management                  $19.2 billion
Barclays Global Investors                    $18.9 billion
ESL Investments (estimated)                  $18 billion

To contact the reporters on this story: Andrei Postelnicu in London at apostelnicu@bloomberg.net; Jenny Strasburg in New York at jstrasburg@bloomberg.net

Last Updated: March 5, 2007 15:22 EST