Love picking stocks and hate making macro calls? 2014 could be your year.
Over the first four months of the year, hedge funds are up only 0.4 percent on the whole, versus the 's 1.9 percent rise, according to a Sunday note from Bank of America Merrill Lynch. But what's impressive is the performance of market-neutral hedge funds. They are up 2.65 percent, making them the best-performing group. Coming in second is event-driven funds, with a 2.12 percent rise.
By comparison, macro hedge funds, which attempt to capitalize on global macroeconomic trends, are down 1.6 percent.
"I think that is has become very much a single-stock-driven market, more than sector-[driven] and definitely more than broad indices-[driven]," said View from the Peak founder Paul Krake. "Given the dispersion between sectors and stocks within sectors, right now it all has to be done at the single-stock level."
Krake, who runs a macroeconomic advisory business that serves hedge funds, actually believes that macro funds are doing far worse than the numbers suggest. He says it's nearly impossible to overstate the difficulty of the current environment.
"People have gotten the macro just so wrong," he told CNBC.com. Funds "made a boatload of cash last year, and they came into 2014 with the same strategies they had in 2013. They were betting on steeper U.S. yield curve, they were massively long Japan, they were massively short China, and people were long growth over value. And everything people have touched has just gone bad."
That said, some exceptional opportunities have presented themselves for savvy stock pickers.
To be successful as a market-neutral fund, "you need low returns, you need dispersion in returns, and you need things to move. This year, we've had a nice confluence of all things—the sun, the moon, and the stars, if you will," said Nicholas Colas, chief market strategist at ConvergEx Group. "You've had real opportunities to make money if you've been sensible enough to short momo [or momentum] names."
After a year in which nearly every stock soared, and market neutral funds struggled, Colas cheers this change.
"This is a wheat-and-chaff kind of market," he said. "You have a to be a clever, creative thinker to get ahead. And if we can learn anything about what's happened so far, it's the old maxim that you have to be a contrarian to be a good investor. Going with the herd feels good for a while, and then you get trampled."
This leaves precious few good options for macro funds.
"Last week I just said, get out of everything. It's just too hard," Krake said. "I couldn't tell you what the next 5 percent in the S&P's going to be. It's really confusing."
"I am disappointed to say the world's a stock-picking world, but I can't name a single sector I want to own," he added.
So what should the individual investor do? At the very least, Brian Stutland of the Equity Armor Investments advises making one's portfolio a bit more market neutral. Without selling one's favorite equity holdings, this can be accomplished by buying volatility products, shorting S&P futures or shorting specific names.
"Protecting your portfolio as a market-neutral strategy just makes a lot of sense right now," Stutland said.