Investors know that hedge fund returns have been less than dismal in 2008. Many would suggest the opportunities are dwindling. This writer would like to offer that hedge funds can’t get leverage so important to performance investment banks are short of capital to lend them. Just look at the demise of Lehman Brothers. Some believe hedge funds are protecting their capital should investors begin demanding their funds back.

Whatever you believe, the fact is that investment banks have been reining in their proprietary trading operations leading hedge funds with little access to credit. And if hedge funds can’t trade, then their principal fuel is being taken from them. This contraction in equity trading is not just restricted to the U.S. markets, it’s global. For example, volume on the Shanghai Stock Exchange fell 75 percent compared to the same period a year ago, and it has declined sharply on all major global exchanges. Lastly, thin markets can exaggerate price moves for equities. The value of equities fell for the first time since Citicorp began compiling such data in January 2003, dropping 29 percent.

Perhaps we are entering a time when the appetite for risk is declining. If so, look for hedge funds to try to seek out other investment opportunities such as private equity, or convertible bonds to support their fee schedules.  - RM