September 9, 2008, 1:26 pm Hedge Funds Cool Their Heels Posted by David Gaffen Hedge FundIf you donât have much idea where the market is going, chill out â some of the more sophisticated investors are having a hard time answering that question also. Hedge funds have, for the most part, performed dismally this year, and while the aggregate hedge fund is still doing better than the Standard & Poorâs 500-stock index, thatâs hardly the goal of these investors, which seek positive returns no matter what the environment. The conflicting market signals, concerns about slowing economic growth and the ongoing financial-sector meltdown have resulted in a massive cash-raising by hedge funds, according to analysis from Merrill Lynch. Cash balances in hedge funds rose to a record $155 billion in July (the latest data available), as these investors reduced positions in previously strong sectors that are now struggling. âHedge funds have delevered their portfolios and become defensive, and are now sitting on a lot of cash,â says Mary Ann Bartels, chief U.S. market analyst at Merrill Lynch. According to Merrill, the year-to-date performance of diversified hedge funds through September 2 is negative 7.46%, compared with a 13.7% decline in the S&P. Macro-oriented hedge funds, those that invest across a number of sectors and asset classes, were hit particularly hard in August, a result of weakness in widely-held technology shares and resource stocks. âSo many people donât know whatâs going on,â says Michael McCarty, options strategist at Meridian Equity Partners. As investors move to cash positions, âthe biggest-owned stocks are down and the biggest-shorted stocks are up â you sell what you own and buy what you short.â That explains, in part, the massive move in financial shares of late, which have recovered from the depths seen in mid-July. Technology, meanwhile, has struggled, particularly popular names such as Google Inc., and the resource stocks have come under pressure as commodity prices have slipped. The $155 billion in cash is equivalent to about 8% of hedge fund assets, according to Ms. Bartels, a bullish signal, for hedge-fund managers do not tend to stay in cash for long. With seasonal factors soon turning in favor of stocks (the last three months of the year are generally among the strongest for equities), investors arenât likely to remain on the sidelines for long. âTheyâre going to want to participate to boost their numbers,â Ms. Bartels says.