The highest-profile changes suggested in the SEC's report last October were a requirement that funds should be required to register as investment advisers, and the removal of the ban on hedge funds advertising to 'qualified' (ie, rich) prospective clients. It now seems likely that any changes won't take effect until 2005, leaving hedge funds free to continue their largely unregulated existence for a further year at least. And what strategies will they follow in 2004?

According to Tremont, the best-performing strategies in 2003 were emerging-markets funds (up an average 24.3% to end-November) and 'distressed' funds (up 23%). But in a close-run race, the S&P was up 22.3% in 2003, outperforming hedge funds that trade equities (up 14.5%) and fixed-income arbitrage (up 7.1%).

It's always difficult for hedge funds to beat a broadly-advancing equity sector, but few pundits see the broad market advance continuing in 2004, meaning that contrarian or 'long-short' hedge fund strategies may be more successful than the equity markets.

Hedge fund managers are also expecting "fixed-income arbitrage" strategies to do well out of a highly volatile international interest-rate and currency landscape. For the same reason, "global macro" funds, which trade mainly in bonds and currency derivatives, may do well.

Corporate bonds are thought to be a more chancy area for 2004, although if there are a few more Parmalats waiting in the wings, that will ensure another bumper year for the 'distressed' funds.