Merrill Lynch has warned investors that the rapidly growing $200bn (€165bn) funds-of-hedge funds industry is failing to outperform other investments, largely because of high fees.

The warning from Merrill Lynch comes as Man Group, one of the world's largest fund-of-hedge fund managers, came under fire for poor performance of its flagship single manager hedge fund Man AHL. One investor said the fund is down 8.54% over the first half of 2004. This will affect management fees, performance fees and the company's ability to attract new funds.