By Svea Herbst-Bayliss

BOSTON, April 8 (Reuters) - Hedge fund Coatue Management plans to return as much as 35 percent of its assets to investors this summer after its $7 billion flagship ballooned in size.

Telling investors that the firm does not want to become an "asset gatherer," Coatue in a letter said that it made the "tough" but "necessary" decision to return between 25 percent and 35 percent of the main fund's capital on June 30. Portions of the letter were read to Reuters by a person familiar with the fund but not permitted to discuss it publicly.

Coatue becomes the latest in a string of prominent hedge funds to return money to investors to keep from growing too large at a time many more investors are trying to put money into hedge funds.

Founded in 1999 by Philippe Laffont, Coatue makes big bets on technology oriented stocks and counted Apple, Facebook, and Netflix among its biggest investments at the end of the fourth quarter, according to a regulatory filing.

The firm said it considered returning capital for many months and made the decision to avoid becoming what some industry analysts call asset gatherers where fund managers eagerly pull in new money even if they don't have fresh ideas about where to invest the cash.

Coatue, whose manager was trained at Julian Robertson's famous Tiger Management, announced its decision just days after telling investors about the firm's first quarter losses. Coatue lost 8.7 percent in March, in the wake of a sell-off last month and ended the first three months of the year down 7.4 percent.

The question of size has long been a critical topic for hedge fund managers and investors alike, with many saying it is prudent to return capital if the fund has grown too quickly and investment opportunities are more limited. Coatue's flagship fund grew from $1 billion to $7 billion within six years. The appropriate size for the fund is closer to $5 billion, the letter said.

Late last year, Daniel Loeb's Third Point, Jon Jacobson's Highfields Capital and Seth Klarman's Baupost Group, returned money to investors to keep their firms from growing too quickly. In the past, Chase Coleman's Tiger Global Management has also returned money to investors.

Even as some of the industry's top managers are now closed to new money, demand for hedge funds continues to grow among institutional investors who added another $32.6 billion to hedge funds in the first quarter, according to data from Eurekahedge. In the fourth quarter, investors added $10.5 billion in new money, according to Hedge Fund Research.

(Reporting by Svea Herbst-Bayliss; Editing by Sofina Mirza-Reid)