June 13 (Bloomberg) -- Ten hospitality huts border a grassy amphitheater like quayside brothels waiting for the next ship. Bankers from Credit Suisse Group, Goldman Sachs Group Inc. and Barclays Capital loiter at the entrances, champagne and pick-up lines at the ready to seduce passing trade.

Welcome to ``Hedgestock,'' a two-day festival at an English country estate last week featuring about 4,000 of the great, the good and the hangers-on of the hedge-fund industry. En masse, the new Masters of the Universe are a pretty good-looking bunch. They are drifting into a disappointing adulthood, though, after a promising adolescence, much as the Swinging Sixties morphed into the Soporific Seventies.

The vibe at ``Hedgestock'' serves as a metaphor for what ails the hedge funds. Instead of changing the world of investing with idiosyncratic gambles, new strategies and outrageous bets, hedge-fund managers are turning into their parents.

They're all backing the same trades, behaving like index- tracking mutual funds. Instead of convincing investors that the only way to make 50 percent in a year is to be willing to lose 20 percent in a quarter, they eke out profits by retiring winning trades almost as soon as they are in the black. Instead of scouring the globe for unidentified gems, they spend their time bandwagon-hopping.

``The correlation of hedge-fund returns is very worrying,'' said Donald Sussman, chairman and founder of Greenwich, Connecticut-based Paloma Partners Management Co., who spoke at a panel discussion in a tent at the festival. ``Everyone does well in a bull market, and badly in a bear market.''

Herd Instinct

That's not how hedge funds are supposed to behave. Provided they all have different trading strategies, there should be a broad distribution of returns no matter what's happening to stocks, bonds and commodities.

They are also supposed to be able to make money in a declining market because of their ability to go short, or sell securities they don't own in the expectation of buying them back cheaper at a later date and pocketing the difference. That is, after all, how they got the name hedge funds.

In May, however, hedge funds investing in emerging markets dropped about 4 percent, according to Hedge Fund Research Inc. in Chicago, their worst performance since September 2002. They lost money as Morgan Stanley's index of 25 emerging stock markets slid 11 percent. A tumbling market should be manna from heaven for an agile hedge fund. If everyone owns the same securities, though, it can spell disaster.

Flower Power

``Would you like a flower?'' asked the pretty girl wandering through the crowd with a box of daisies. ``Does it do anything?'' asked the hedge-fund manager, who may know the prices of lots of things but is perhaps missing the value of everything.

The festival made clear where the balance of power currently lies in financial markets. Investment banks are desperate to win the business of conducting trades and meeting infrastructure needs for hedge funds. Investors are desperate to boost returns by giving their money to hedge-fund managers even if that means paying a 2 percent fee and giving up 20 percent of future profits. All of which bestows an air of what can only be described as smugness on the guys in the open-necked shirts.

Who knew there were 4,000 participants available to corral in a field a 90-minute drive north of London? It's hard to shake the feeling that hedge funds, especially the newer ones, are trading on the glories of their predecessors, much as ``Hedgestock'' tried to appropriate the garb of Woodstock, the legendary music festival held in a field in upstate New York in 1969.

Uncool in the Kaftan

``Fake!'' screamed the gaudy flower-power designs painted on the Volkswagen camper van, just across the field from four brand- new Bentleys gleaming in the sunshine. ``Fake!'' shouted the plastic love-bead necklaces draped over hand-tailored $200 Egyptian cotton shirts. ``Fake!'' hollered the too-neatly tie- dyed T-shirts adorned with corporate logos.

Like any good festival, the highlight of ``Hedgestock'' was a rock concert. The Who has probably never played to an audience with as much potential to outshine Roger Daltrey and Pete Townshend in the wealth stakes. The green-and-gold Harrods helicopter that ferried the rock gods to their nighttime gig looked cheap and nasty in comparison with the Aston Martins lined up in the parking lots.

Proceeds from the impeccably organized event go to the Teenage Cancer Trust. Organizer Simon Ruddick, 45, said he expected to raise ``hundreds of thousands of pounds,'' though he was reluctant to name a figure ``until all the money is in.''

Ruddick is the managing director of Albourne Partners Ltd., which acts as a matchmaker between hedge funds and investors for 65 clients, with $100 billion invested in more than 1,000 funds. The more I come across statistics like that, the more I worry that hedge funds will become victims of the law of large numbers; there just aren't enough unique investment opportunities to sustain such a sprawling community.

Grow Old Disgracefully

With ``Hedgestock'' tickets costing 500 pounds ($920) each, the hedge-fund industry now has its own version of Michael Milken's legendary ``Predators' Ball.'' Ruddick says he's hoping to repeat the event next year and make it an annual gathering.

``Hope I die before I get old,'' goes the Who classic ``My Generation.'' Let's hope hedge funds get a chance to redeem themselves by growing old disgracefully before they die.

(Mark Gilbert is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Mark Gilbert in London at magilbert@bloomberg.net.

Last Updated: June 12, 2006 19:09 EDT