The hedge fund sector has been fundamentally redefined and presents attractive opportunities within trading orientated and liquid strategies, according to Morten Spenner, chief executive of International Asset Management, the London-headquartered fund of hedge fund investment manager.

After record poor performance in 2008, the outlook for hedge funds has now brightened with positive performance and a continued reduction in redemption rates being key signs of the sector’s stabilisation. Moreover, industry monitor Eurekahedge called May these investment pools’ best month in “almost a decade.”

Various hedge fund indices are broadly positive year to date, with the exception of CTAs, and are outperforming global equity indices, Mr Spenner notes, adding that the prospects are improving for funds of hedge funds and certain hedge fund strategies.

He sees the selling pressure from funds of hedge funds abating due to FoHF closures, better access to credit lines, improving cash flow from underlying investment redemptions and fewer forced sales. Additionally, Mr Spenner believes that going forward the strategies which will have the greatest opportunities will be those will a single approach like equity long/short, trading, event driven and credit arbitrage. Conversely, illiquid and complex strategies will be out of favour, he said, and there will be less appetite for path-dependent strategies.

Mr Spenner also argues that relative value strategies for small funds - those less than $1 billion - will be problematic, as prime brokers will offer less attractive credit lines. But smaller long/short equity funds will not be impacted, as they are less reliant on financing, he said.

Mr Spenner does however believe that there are also increased risks to the hedge fund industry, not least from regulatory moves such as short-selling bans and the prospect of punitive tax regimes. Another issue he highlights is that providers of credit are unwilling, or unable, to provide credit lines under the same conditions and to the same extent as previously was the case.

Among other developments, Mr Spenner points out that within hedge funds the quality of risk/reward is under more scrutiny and that the use of risk aggregation and other risk controls to account for tail risk is increasing. Counter-party risk is also high on the agenda, he notes, with increased moves being made to diversify this risk through the use of multiple prime brokers and cash balances being invested on a conservative and diversified basis.