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By the Opalesque Team:

While the hedge fund industry's disappointing performance in 2008 was one of the major drivers of redemptions, managers largely succeeded in protecting capital. As investors have dipped their toes back into the space, reallocating to hedge funds and increasing industry assets by $100bln in 2Q09 (according to Hedge Fund Research) managers remain focused on both locking in gains and protecting from possible future losses should the markets shift again.

The Hennessee Hedge Fund Index reported a gain of 3.37% in July (+15.50% YTD), returns that showed hedge fund managers participated in the bull market rally, but industry-wide trailed the S&P 500 which gained 7.41% (9.32% YTD). The Hennessee Long/Short Equity Index gained 2.89% during July (+13.39% YTD). The Hennessee Group reports the gains were driven largely by long positions and managers fell short of benchmarks largely due to short position and to hedges used to protect capital.

"Managers opened up their net exposures to participate, but also benefited from a better than expected earnings season. However, managers remain vigilant, knowing that the markets could crack and crack quickly. The VIX is at pre-crisis August 2008 levels and that worries many," said a statement by Lee Hennessee, Managing Principal of Hennessee Group.

As market gains hold longer than many have expected, there are still concerns that a correction will occur at some point. Bob Doll, BlackRock Vice Chai......................

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