NEW YORK (HedgeWorld.com)–Absolute-return strategies in foreign exchange markets and opportunities in Japanese equities are intriguing new trends for 2004, according to Virginia Parker of Parker Global Strategies.

She expects hedge fund assets to grow by around 20% in 2004, in large measure from investments by U.S.- and Japan-based institutions. Merger arbitrage is among the strategies likely to perform well, as are long/short equity and distressed securities, which did exceptionally well this year.

While the U.S. stock market could have a correction in 2004, it probably will continue to offer investment opportunities, as the economy appears to be strong, she argued. And for the first time in a decade, there are meaningful signs of recovery in Japan, such as bank loans being paid off.

“Many Japanese managers believe that 2003 might be the first year of a sustained bull market in Japan,” said Ms. Parker.

Currency Risk

Some managers achieved high returns in currency markets this year, she pointed out. The U.S dollar continues to decline against the euro, but from a fundamental perspective that trend should reverse, because the U.S. economy is growing faster than European economies.

Large shifts in exchange rates make currency risk especially important for investors. For example, foreign investors in the United States may have been hurt by the declining dollar this year. To address this risk, many pension funds are considering whether to add an absolute-return strategy for currencies, said Ms. Parker.

This is a recent approach that has started to take the place of currency overlays. A currency manager can go long or short to the base currency. “This is a very sophisticated approach that was first used by some Canadian pensions about four years ago,” she added. “Now that approach is working its way around the globe.”

Merger arbitrage opportunities have been scarce since 2000, but mergers and acquisitions picked up this year. “We think that will continue into 2004,” she said.

On the other hand, emerging markets may not yield as a high return as they did this year and 2004 may be a tricky time for directional fixed-income strategies. If Ms. Parker had to make a single hedge fund investment, it would be in a diversified fund of funds. “I don’t take big bets,” she said.

CKurdas@HedgeWorld.com