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Money managers under the microscope

Bouncebackability

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rtr1rmafHedge fund returns have bounced back in January after their bleak 2008.

Data from Hedge Fund Research shows they returned 0.39 percent in January, having lost 18.73 percent in 2008, although they gained 0.21 percent in December.

The start of a revival in hedge fund returns? Well, maybe, and maybe not.

One explanation is that returns are just bouncing back after losses were exacerbated by redemptions late last year.

Hedge funds knew they were going to face redemptions at the end of the year, so they started liquidating positions. If they were for example short Tesco and long Sainsbury, they would have to buy back Tesco and sell Sainsbury to raise the cash. Unfortunately this works against other funds who are playing that particularly relative value trade, as the value of their short rises and their long falls.

However, come January, when the selling pressure has at least temporarily abated, that relative value trade now looks even more enticing than before, meaning some funds dive in, the trade moves back in favour of those funds who hold it and returns bounce back.

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