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Investor optimism may be back but it will be some time before more Ferraris are parked outside hedge fund offices in London’s Mayfair. Cash is again making its way back into hedge funds’ coffers, after many just closed their best quarter for years. This is good news – although not surprising given that the overall market has experienced its best quarter in years, too. With such a strong tailwind it has been hard to lose money. For example convertible arbitrage funds, the best performer, have yielded an average 24 per cent return this year, according to EDHEC, the French business school.

Listed hedge funds have enjoyed the boost. Shares in London-based Man Group have rallied by almost 90 per cent from their 288p March low, outperforming the FTSE 100 by 26 per cent this year. Yet, even though the world’s largest listed hedge fund says it expects client flows to reverse, for now money continues to exit. Similarly, Swiss bank Julius Baer said on Monday that clients continued to pull money from its hedge fund unit – some SFr500m ($470m) in the first half.

Although outflows are slowing – according to Hedge Fund Research, they fell to $42bn in the second quarter from $152bn after Lehman’s collapse – the industry needs to string together a series of quarters of stable returns to soothe investors’ nerves. There may also be a flight to quality, with nervy types preferring to invest with larger companies that have diversified trading strategies. In a highly fragmented and over-populated industry, such firms will be the likely winners, especially as they can better afford to attract investor money back through lower fees. US hedge fund Fortress is considering gobbling up competitors. The big boys are about to come out to play. Smaller funds may need to watch out.

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