Picture this: Your hedge fund had a pretty good 2008. By slashing net exposure, it ended up roughly flat. Towards the end of the year, those funds that blinked and went long-biased got whacked, but not yours. You hung tough and maintained low net exposure in 2009.

Conundrum number one: It is not easy to make that decision to switch bias, and yet every day that the rallied markets don't reverse direction makes it less probable that they ever will flop. In the meantime, the portfolio manager might think the markets are over-valued and pray they will return to former lows, and to boot, he wouldn't mind a second bite of the cherry.

Conundrum number two: Investors in 2008 said that they wanted to see a reversal of market fortunes before writing hedge fund tickets. However, that reversal has now happened, but paradoxically, they still aren't writing a lot of tickets because many feel they might have missed the market. On the other hand some investors perceive managers with low net exposure as being unexposed to the upside and perhaps not very sexy.

Conundrum number three: Hedge funds that did fairly well in 2008 found that they were the ones who were first in line for redemptions. That harks back to a simple psychological driver -- you sell the investments on which you've made a profit. The investments on which you're down, you hang on to in the hopes of jam tomorrow. So the good funds got penalised. Yes, the bad ones got penalized too -- by virtue of losing money -- but what we saw, for the first time ever, was good funds having to impose gates to counter this phenomenon.

London-based Threadneedle Asset Management (formerly Allied Dunbar) has seen its assets under management fall from $4 billion to $100 million. Its Asian Crescendo Fund is run from London by Jan De Bruijn, a veteran of Scottish Widows and Shell Pension fund, before joining Threadneedle.  Last year the fund's performance was flat, and this year the fund is down 3%.

So the fund has missed the 2009 bounce but kept its honour for 2008.

Net exposure was raised to 40%, but the portfolio manager is now thinking about pruning net exposure back to 20%.

"Liquidity has gone into high beta and small- and mid-caps, ones whose share price had tumbled. I think it's overdone, but the surplus liquidity may keep their prices up," says De Bruijn. "I think there could be a switch now into shares where the fundamentals are better."

He is in town to talk to investors, but investors who pay lip service to the merits of conservatism may not be prepared to put their money where their mouth is.

"Asian investors' priorities that they look for in Asian hedge funds are different to what I experience in Europe and the USA," he adds. "From what I see, a lot of Asian investors value outperformance, rather than the funds that offer uncorrelated returns."

Many sophisticated investors still perceive hedge funds as capital protectors in bad years. But what if this isn't a bad year (and it doesn't feel much like one). In that case, some alternatives investors might fancy a few huge, concentrated 'shoot the lights out' bets from their hedge fund.  

A lot of hedge funds have been caught in this triple vortex, and experience the same sense of angst, but then nobody ever said life was meant to be fair.