Hedge Fund Managers Sticking Their Toes Into the Investment Waters

January 15, 2012

Apparently no one has given the all clear sign for hedge fund managers and investors because both still seem somewhat apprehensive about going back into the water. According to the latest data from International Strategy & Investment Group, managers’ net exposure in the stock market is nearly as low as it was back in 2009.  Managers didn’t get a lot of encouragement from investors as gross outflows exceeded gross inflows going into the month of January.  This as the stock market experienced its best January start since 2006. Both managers and investors seem to be having a hard time getting in sync as concerns over the European crisis and potential whipsaws in the stock market have made everyone a bit more apprehensive.

Hedge funds are still reeling after a disappointing year in which the average fund lost 4.9% and stock-focused funds lost an average of 19%. Investor disillusionment didn’t really set in, however, until they saw that their funds, which had declined severely over the summer, missed the October rally in which the stock market gained 17%.  The year ended badly for most funds leaving befuddled investors wondering what it is they are paying their hedge fund managers for.

Hedge fund managers may still be taking a cautious view of the market as the Euro-crisis continues to threaten economic growth and instability in the financial system.  And, while keeping their net exposure to risky assets low seems like a prudent course for many hedge fund managers, investors are anxious to have them get back in the game. With alternative investments still offering the best opportunity for achieve non-correlating returns, and with interest rates hovering near their all time lows, institutional investors with base return hurdles are over a barrel, which is why most of them will continue to pour money into hedge funds.

It is expected that hedge fund managers will face the same challenges in 2012 as they did in 2011 – more random volatility, a narrowing of correlations, and crisis-fueled uncertainty on the verge of chaos. Undoubtedly, fund managers will be on the hot seat from day one, tested early and often beneath the steady glare of impatient investors. The good news is that, as of January 1, everything starts at zero again. The water is clear, so everyone can get back in the pool.


{ 1 comment }

Dinah Carver January 20, 2012 at 10:41 pm

I’m not an expert when it comes to this. Didn’t even know this was possible. Useful read, appreciate your posting this.

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