Perhaps the summer torpor is sinking in on the frontline, but hedge funds need to be cautious of being dragged into a midsummer slumber. Because without wishing to tempt providence, it looks like the summer of 2009 might be turning out a lot quieter than that of 2008.

According to Eurekahedge, the overall hedge fund index was down 0.02% in June, compared to a 0.7% fall in the MSCI World Index. It reckons that hedge funds were up 9.4% for the first half of the year, while the S&P 500 was up 1.8%.

Asia hedge funds are up on average nearly 15%. That means they are three quarters of the way to wiping out the losses of 2008. The best performing strategy is event driven, for which the average fund is up 18% this year.

The distressed-debt hedge fund sector, which was 2008's top stinker with a 26% decline, is up just 5% for the first half of 2009. So when are distressed prices going to fall to a level so that the mooted distressed fire-sale can take place? As time passes, perhaps the question is whether sellers will ever buckle and mark down prices.

As market volatility continues to decline for now, that means we should see alpha opportunities for hedge fund stock pickers rather than those who make huge macro bets.

"I would say that funds of funds who have continued to seek uncorrelated returns, especially from equity market directionality, should start to distinguish themselves," says Mark Reinisch, director of fund of hedge funds FRM in London. "This will become even clearer if the equity markets enter a consolidation phase or worse over the next few months."

Hedge funds still appear to be keeping one foot in the bear camp.

"Liquidity has gone into high beta and small- to mid-cap names," says Jan De Bruijn, the portfolio manager of Threadneedle's Asia Crescendo Fund. "The rallies have been broad based, and I think they were too much, but liquidity should still keep them up. There could be more of a switch now into fundamental value. I am positive about Indian and Chinese consumer and infrastructure stocks. I am not so keen on industrials, such as shipbuilders, and exporters."

He is keeping his fund's net exposure at low levels.

Eurekahedge estimates net hedge fund inflows amounted to $4 billion in June, bringing industry assets up to $1.33 trillion. So the money is only trickling back. That money is going to bigger funds, and smaller funds are still finding it tough to get new capital.

It looks like the time to swing towards long bias is not yet here. Summer may therefore be marked by minor, but telling, skirmishes in the struggle for hedge fund returns, rather than a big push forward.