'The first quarter of 2009 provided a much needed confidence boost, after what was the worst ever year for FOHFs in 2008,' said Standard & Poor's Fund Services lead analyst Randal Goldsmith, pointing out that absolute returns had stabilised, with around one per cent achieved by the median Standard & Poor's rated FOHF to the end of March.

This contrasted with the 12 per cent loss shown by global equities as measured by the Standard & Poor's Global 1200 index during Q1 2009. Goldsmith recalled that last year FOHFs had outperformed equities by a large margin. 

'Outperforming by losing less money, no matter how significant the difference is, is not quite the same as outperforming with a positive return and investors gave the verdict with their feet,' he says.

Now, however, Goldsmith says he will be surprised if money does not begin to flow back into FOHFs, if the positive absolute returns achieved in the first quarter of 2009 are sustained over the rest of the year. Although he warns there will be some exceptions.

'After the liquidity problems of last year, investors may not be very forgiving of those funds that suspended redemptions or applied gates. They may limit their new investments to those FOHFs that managed liquidity well during the crisis period,' says Goldsmith.

Goldsmith forecasts that liquidity constraints will persist for FOHFs at least until mid-2009, as the backlog of withdrawals is worked through. However, he notes some encouraging signs, such as the news that some of the large hedge funds that locked up FOHFs' money last year have started to pay back cash earlier than expected, improving the liquidity profile of portfolios.

In addition, net withdrawals from FOHFs during the first quarter of 2009 were lower than in the last quarter of 2008, according to industry estimates.