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This article was written by Bryan Goh, First Avenue Partners LLP, London, in reference to yesterday’s article ‘Hedge funds under fire for not spotting market rally’ (Source):

Hedge funds have been accused of missing the equity market rally begun March 2009. Let us look at an example of an equity market such as the European equity markets to see why.

Equity markets are up year to date. The Stoxx 600 for example is up some 6% year to date after a 22% drop followed by a 37% rally. Yet it has been a very difficult market for trader and investor alike. Only the truly brave make big money (I am being polite.)

Sentiment worsened almost linearly and certainly monotonically since September 2008 to March 2009. Then suddenly equity and credit markets turned and rebounded sharply. By late April, commentators began talking about ‘green shoots’ of growth and recovery. I guess even a dab of moss after a nuclear Winter counts as green shoots. Equity markets have behaved erratically. Cyclicals led the rebound, defensives lagged it. This is typical of late stage recessions and recoveries, yet fundamentals are far from healthy.

Markets, however, are driven by fundamentals only until they are driven by psychology. Healthier is ......................

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