While most global equity markets have declined more than 20 per cent from their peak in October 2007, a measure of how well long/short hedge funds perform shows that this type of investment made slender returns of 0.15 per cent, over the same period, according to Hennessee, an advisor to hedge fund investors.

As the equity markets have entered into a technical bear market, hedge fund managers seem to have successfully protected capital in a severe and volatile down market due to hedging and adjustment of portfolio exposures with respect to market movements.

The latest research data highlighted a trend in the hedge fund industry wherby managers, in an environment of increasing volatility and uncertainty, have reduced their risk appetite and reallocated investments to cash and less risky assets.

Hennessee’s research indicates that the average net exposure of long/short equity hedge funds fell by 16 per cent over the past year, from 52 per cent at the end of the second quarter of 2007 to 36 per cent in the second quarter of 2008. 

The tightening of net exposures over the last year was largely due to managers’ trimming of margin and long portfolios, as the average long portfolio declined 21 per cent from 114 per cent (Q2 2007) to 92 per cent (Q2 2008). The short positions were only trimmed by 5 per cent from -62 per cent (Q2 2007) to -57 per cent (Q2 2008).  These portfolio adjustments reflected negative market bias by managers.