Hedge funds make comeback

With the rebound in global stock markets, hedge funds are starting to gain traction again.

Hedge fund assets may top the previous $2-trillion (U.S.) high by the end of next year as double-digit returns lure investors, says Barry Bausano, Deutsche Banks AG`s global co-head of prime finance. According to data from Chicago-based Hedge Fund Research Inc., hedge fund assets recovered to $1.53-trillion by September from this year`s trough of $1.33 trillion in March.

But Richard Bernstein, a former Merrill Lynch investment strategist who runs his own firm, raises an interesting red flag about how the improved performance of hedge funds is actually bad news for the industry, and the asset class over the longer term.

The easy money from a rising stock market will "probably once again lead hedge funds to shorten investment time horizons, to speculate more and to attempt to increase leverage to drive performance" instead of adhering to an original investment strategy that might drive "alpha," Mr. Bernstein contends.