Best Hedge Fund Investing Styles. Summer Rally For The Longs?

In the CNBC video below, Bill McIntosh, editor of the Hedge Fund Journal, outlines the state of the hedge fund industry, with a focus on those strategies that have been doing well since the market correction last year. Equity-based strategies, arbitrage, and long-only emerging markets have been doing the best (see Hedge Funds Review article for more on emerging market funds). Not surprising, funds investing in banking and energy stock have been doing well. Defensive funds have underperformed, even though they have at least been able to preserve capital as advertised. The increased optimism is also causing most hedge funds to remove gates and lockups that were put in place late last year.


Source: CNBC Video
As reported at both Reuters (see article) and Bloomberg (see article), and discussed in a previous post, redemption request have decreased, and there is an expectation that investors will add $50 billion into hedge funds this year in an effort to catch the current wave, and hopefully recoup some losses suffered last year. Whether this is a bullish or contrarian indicator remains to be seen. Given the recent market moves, along with inflation and debt worries (see previous post), there are concerns of near term bearishness (see previous post). Yet, if "panic buying" starts occurring from the nearly $3.8 trillion currently sitting in retail and institutional money market funds (see Huffington Post article), a nice summer rally may still be in the cards.

As for the hedges, it will be interesting to see if the smaller funds can regain their out-performance status over larger funds, after falling behind last year (see Hedge Funds Review article). Even with their flexibility, this may be difficult given the trend for skittish investors to now require a track record of accomplishments, which is sometimes easier for the larger funds to provide (see Financial Times article). Of course, if the market continues to rally, greed may starting winning out over fear of loss (possibly replaced by the fear of missing out), regardless of the managers style or size.