Hedge Funds See Best Q1 Since 2006, Though Concerns Mount

Hedge funds may be off to their best start in six years, but the industry is on high alert with Europe likely in a recession while the U.S. struggles to hang on, according to Hennessee Group.

It appears Advanced Trading's piece on the bright outlook for hedge funds in 2012 proved true during the first quarter.

Hedge fund returns lagged that of the equity markets during their first quarter rally, but the industry nevertheless got off to its best start since 2006, according to Hennessee Group, an advisor to hedge fund investors.

The Hennessee Hedge Fund Index inched up 0.59 percent in March and is up 4.59 percent for the year. That compares with the Standard & Poor's 500 index's 3.13 percent climb in March, and a 12 percent surge for the year to date, according to Hennessee Group data.

"Hedge funds posted their best first quarter since 2006 but lagged equity markets as managers were conservatively positioned," said Hennessee Group managing principal Charles Gradante. "However with 77 percent of stocks currently trading above their 200 day moving average, many managers believe the market may be due for correction."

Indeed, the U.S. market rally to start 2012 appears to be contracting amid weaker-than-expect job growth in March and rising concerns the U.S. economy may be too weak to prop up the global markets if Europe falters.

These are among the range of concerns that hedge fund managers are grappling with as the second quarter gets underway. Their worries also include fears economic growth may be slowing in China and other emerging markets, along with the cloudy political scene in the U.S. ahead of November's elections, Gradante added, suggesting hedge funds may choose to remain conservatively positioned with so many variables at play.

"The challenge for hedge funds is participating in the upside of the rally without getting caught with too much exposure if the markets have a sharp reversal," Gradante said.

As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio