Clients plan to add the most money this year to hedge funds that trade stocks. The bullish view on equities has proved correct so far in 2013 after the U.S. Dow Jones Industrial Average climbed to a record this week.
Investor concern that so-called tail-risk events, such as a European default or a budget impasse in the U.S., will trigger a sell-off in equities has diminished. Clients have concluded that hedge funds will be able to select winning and losing companies in 2013, as stocks no longer trade in lockstep with each other, Credit Suisse’s Leonard said.
“Correlations are coming down and it’s becoming a much better environment for stock pickers,” he said.
The bullish view on stock-focused hedge funds marks a reversal from seven months ago. A July survey by the same bank found 26 percent of clients said they planned to cut their allocation to long-short equity funds in the third quarter. Equity hedge funds underperformed the Standard & Poor’s 500 Index and other market benchmarks on average in 2010, 2011 and 2012, prompting some investors to retreat from the pools.
Investors are still becoming increasingly bearish on so- called managed futures hedge funds, which typically use computer algorithms to follow trends in asset prices.
Such hedge funds have lost money on average over the past two years, as market sentiment swung from positive to negative based on the perceived health of Europe. Net investor demand for managed future funds plunged to 7 percent from 37 percent a year ago, Credit Suisse said.