• Hedge fund managers have regained their self-confidence
• Liquidity and investability are key factors
• Hedge funds can look forward to a couple of good years

Hedge fund performance, as measured by the HFRX Global Hedge Index denominated in dollars, showed an upturn in the first three quarters of this year of more than 10%. The same index expressed in euros has risen by about the same number. This upturn is heartening, especially after last year’s difficulties. The stability and liquidity of the market have improved noticeably, and one result is that valuations have continued to rise. Despite the rebounds that have occurred this year, the price anomalies that arose in connection with last year’s financial crash have not been remedied in their entirety. Instead, various corrections remain in order to revert to a normal situation.

The emergency measures that hedge funds were forced to undertake after last autumn’s financial market drama continue to be phased out. Examples of such measures are gates and side pockets. Various studies show that impaired assets have steadily decreased during the year, and today they have fallen to around 10% of the total or below. This is positive for hedge funds. The liquidity of underlying investments has improved substantially. Hedge funds have thus been able to use mark-to-market valuations of their holdings instead of employing the “prudence principle” prescribed in accounting rules. This has helped hedge funds achieve good price performance this year. Today most such corrections have been carried out, but not all. Surveys also indicate that flows of hedge fund assets have again turned positive. The first signals of this change came in April and May, and since then the situation has slowly improved.