Are hedge funds suffering a crisis of faith? Fund managers have
moved money out of the market to record-high cash levels,
leverage is historically low, and few managers have figured out
how to profit from the wild swings in the market.
It might seem counterintuitive that hedge fund managers have
become so risk averse. But performance was sluggish this year
even before the markets turned violent in August. Then, in what
seemed like a perfect environment for players known for their
prescient market calls—not to mention their ability to
short—one might have expected them to rebound.
Instead, the losses started to mount.
With the experiences of 2008 still fresh, many managers are
finding few trades where their conviction is strong. The stock
market is difficult to time because of today’s
rampant volatility. With interest rates so low, fixed-income
markets are almost played out,...