When wealthy investors, pension funds and endowments need to juice their returns, they often turn to hedge funds to gain that boost. These aggressively managed portfolios that use advanced investment strategies - including leveraged, long/short and derivatives - have typically been a key way for institutional investors to generate high returns and seek alpha. However, they may need to find other ways to generate those big returns this autumn. Uncertainty remains the name of the game heading into the fourth quarter. A mire of global macro-economic factors are conspiring against investors and the normally aggressive hedge fund industry seems to be playing it safe. For regular investors, following the hedge funds' recent flight to quality could be a good idea.

Forex Broker Guide: Using the right broker is essential when competing in today's forex marketplace.

Cash, Gold and T-bills
Volatile markets and rock-bottom interest rates have crushed the returns of many hedge funds. It's been roughly five years into the financial crisis and while things have gotten better since the collapse of Lehman Brothers, there is still is plenty of uncertainty and general market risk to be had. The risk is causing many typically aggressive hedge fund players to bet heavily on stable assets such as gold, or sit on cash. Additionally, the percentage of leverage (margin loans or debt used to boost holdings) from the hedge funds remains at low levels. Reuters reports that the average hedge fund is only leveraged 3.4 times net asset values. That's far below the amounts seen in the pre-Lehman implosion days.

All in all, "safe" bets seem to be prevailing and there is certainly a reason to be cautious. That list of risk factors seems to grow every day. First, key emerging markets, like China and Brazil, continue to battle slowing growth. Emerging markets were critical in helping the globe return to relative GDP growth during the 2008-2009 downturns. As future growth leaders, any hiccups in the developing world will surely cause hiccups all the way up the food chain.

This point is exacerbated by the fact that the developed world is facing its own issues. Europe remains a mess with its debt issues continuing to compound. At the same time, the United States faces a plethora of political and debt issues of its own. Perhaps none as foreboding as the pending "Fiscal Cliff." That's the January deadline when $7 trillion worth of tax increases and spending cuts will automatically happen - assuming congress doesn't act in time. That "cliff" could have a severe effect on the global economy. With these factors in mind, the IMF recently downgraded its 2012 forecast for global GDP growth to just 3.3%, with 1.3% growth predicted for developed market economies and 5.3% in the emerging world.

Getting Defensive
Given all of these woes facing the global economy, it's no wonder why the hedge fund industry has braced for slowing times ahead. For us regular Joes, that might not be such a bad idea. Marketplace.org reports that hedge funds have been loading up a variety of safe-haven assets during the last few months of the summer. These include gold, short-term bonds and cash. The SPDR Gold Shares (ARCA:GLD) still remains one of the easiest ways to add the precious metal to a portfolio. The ETF is quite liquid and holds physical gold locked in a vault. Likewise, the PIMCO Enhanced Short Maturity Strategy ETF (ARCA:MINT) and Vanguard Short-Term Bond ETF (NYSE:BSV) represent cash and short-term bond plays. While returns for these funds may not be huge, safety concerns could trump the need for growth in upcoming months.

The Bottom Line
With various global macro-economic pressures facing the world's economies, it's no wonder hedge funds are braced for an uncertain fall. The flock to quality has once again been renewed. For regular retail investors, following their lead might not be such a bad idea.

At the time of writing, Aaron Levitt did not own any shares in any company mentioned in this article.

Related Articles
  1. Stock Analysis

    How Medtronic Makes Money (MDT)

    Here's the story of an American medical device firm that covers almost every segment in medicine and recently moved to Ireland to pay less in taxes.
  2. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  3. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  4. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  5. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  6. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  7. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  8. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  9. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  10. Fundamental Analysis

    HF Performance Report: Did Hedge Funds Earn Their Fee in 2015?

    Find out whether hedge funds, which have come under tremendous pressure to improve their performance, managed to earn their fee in 2015.
RELATED FAQS
  1. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Full Answer >>
  2. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  3. Are hedge funds regulated by FINRA?

    Alternative investment vehicles such as hedge funds offer investors a wider range of possibilities due to certain exceptions ... Read Full Answer >>
  4. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  5. Can hedge fund returns be replicated?

    You can replicate hedge fund returns to a degree but not perfectly. Most replication strategies underperform hedge funds ... Read Full Answer >>
  6. Can foreign investors invest in US hedge funds?

    U.S. hedge funds are open to accredited investors. When they distribute profits to investors, those proceeds are taxed at ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center