According to Eurekahedge, May 2009 was the best month in almost a decade for hedge funds. Their overall index was up 5.2% and the industry showed inflows of $1.5 billion, the first time in almost a year that money has come in. Topmost were Asian hedge funds with a corking 9% return, and even Japan came out 4.2% ahead.

Looking at individual strategies, event-driven was up 7.2% and long/short equity was up 6.73%. Everything looks rosy, or does it? We invited a pair of roister-doisters for a friendly wrestle in order to decide the issue.

"Experienced Asian managers know that when you light the blue touchpaper, you'd better be long. We've been expecting a golden age for hedge fund returns. This is it," says GFIA's Peter Douglas. "Alpha is not scalable, it's inversely proportion to the aggregate amount of capital looking for it. The investment banks' prop capital evaporated last year, and what's left is operating at far lower levels of leverage. The hedge fund industry lost 30% of its assets, and, is operating at half the risk compared with 18 months' ago. We estimate that 90% of alpha-seeking capital disappeared last year. There's less capital looking for inefficiencies, hence those inefficiencies remain larger and longer, meaning hedge funds make more money." 

He points out that as flows stabilise, managers feel more comfortable about putting capital to work rather than holding cash for potential redemptions, and there is a multiplier effect, as not only are managers making money on their trades, but they feel more comfortable putting more risk on the table.

Paul Smith of Triple A Partners in Hong Kong begs to differ with the optimism. 

"Asia has yet to experience these asset flows. The current period feels much like the period after the Asian crisis [of 1997-98]. In general, hedge fund managers posted good investment returns as international allocators had left the market and as a result there were good market opportunities due to the lack of competition. However, despite the good returns available, international investors did not want to know about Asia for two reasons. They had just been burnt and there were equally as good investment opportunities closer to home."

Smith reckons that the only change is that there are more Asian investors this cycle looking to invest in Asia. Yet Asia is still driven primarily by US and European money.

Smith adds: "Ask an Asian manager and they will tell you that although they are now getting a dribble of allocations coming in, they are still in a net redemption position month over month. It was only when US and European markets had had a good run and were looking fully valued that international investors really moved back into Asia in force from 2004 on. We are always at the end of the line in the allocation game. What is different this time? Not much, in truth."

If you've seen the Ken Russell film Women in Love, starring Oliver Reed and Alan Bates, you know how rough such grappling can get. So this month we're calling it honours even and deferring the call on whether the hedge fund renaissance has started for a few more weeks.