Hedge funds' lacklustre performance so far in 2005 is turning some investors away from the high-risk investment vehicles to more traditional investments, including cash and money market instruments, US fund managers say.
Over the medium term, the trend by global investors to move back toward safer money market instruments could help the dollar, some analysts reckon.
Compared with lower eurozone interest rates and near-zero money market returns in Japan, short-dated dollar-denominated fixed income instruments are gaining lustre as the Federal Reserve continues to raise interest rates.
"Money funds have seen inflows now in three consecutive months in May, June and July, which has not occurred since the end of 2001," said Peter Crane, managing editor of Money Fund Report, a weekly newsletter in Westborough, Massachusetts.
"Certainly we are on the comeback trail," he added.
By contrast, many currency hedge funds that started 2005 betting the 3-year dollar slide would continue lost money as a result of the dollar's first-half rally.
Hedge funds have generated slim returns of between 1 and 2 percent in the first half of this year because of choppy price trends in stock markets, a reversal of the dollar's downtrend and the slump in the corporate debt market in May.
"Obviously with the continued upward movement of interest rates, there is more of an incentive to be in cash", said Joshua Rosenberg, president of Hedge Fund Research, Inc, in Chicago.
Total returns of the so-called macro hedge funds, which focus on the stock, bond, currency and commodity markets, were 1.5 percent at the end of July, Rosenberg said.
"I have clients who have taken money out of hedge funds and replaced it with more traditional portfolios. I have none in the last few months that have gone the other way", said David Kotok, chief investment officer with money management firm Cumberland Advisors, in Vineland, New Jersey.
Kotok favours a 15 percent weighting to cash and money markets in an overall portfolio, and may raise that percentage slightly because he expects US stocks to decline in September and October due to seasonal flow patterns.
"The fact that you don't lose money in money markets has already been a big selling point, and once you get a decent yield on top of that, it makes people look at the negatives when they get them" in other investments, said Crane, of the Money Fund Report.
Steadily rising US money market rates could give the greenback a substantial boost in 2006, once the dollar has become sufficiently cheap to attract buyers, some analysts said.
The dollar firmed on the prospect of Federal Reserve rate rises in early 2005, pushing the euro down to a 14-month low of $1.1866 in July. But since then, the wide US trade deficit has re-emerged as a factor weighing on the dollar.
"The dollar had its run (higher) for the year and could see some downside pressure from here," said Jes Black, hedge fund manager with Black Flag Capital Partners, LLC in Hoboken, New Jersey.
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