Hedge-fund managers, Wall Street's best compensated and supposedly smartest investors, are dazed and confused.

Reeling from the worst second-quarter performance in a decade, hedge funds have scaled back trading as they struggle to figure out where markets are headed amid sometimes vicious crosscurrents in stock, commodities and other markets, according to brokers and managers.

"There's a degree of being frozen in the headlights, of not knowing what sectors to emphasize, of what securities to emphasize," said Tim Ghriskey, chief investment officer of Solaris Asset Management LLC, a Bedford Hills, New York-based firm with $2 billion in hedge funds and conventional stock funds.

Hedge-fund managers, who oversee $1.67 trillion in assets, are reluctant to put money to work as they are buffeted by a wide range of often conflicting political and economic forces, from fiscal policy in Europe and the U.S., to what regulations will be imposed on the financial-services and energy industries, to the growth prospects in China. In turn, smaller and fewer trades may make it harder for funds to rebound from losses incurred since May, when the industry suffered its worst decline in 18 months.

"For many people, it's a frustrating market given the high volatility and low volumes," said Aaron Garvey, portfolio manager at MKP Capital Management LLC, a New York-based hedge fund overseeing $3.5 billion. "We are seeing strong opposing forces in the markets, which makes generating strong convictions difficult for the medium- and long-term."

Holding Cash

Prime brokers such as Credit Suisse Group AG and JPMorgan Chase & Co. that service hedge funds report that managers are borrowing less money and are sitting on more cash. Credit Suisse's hedge-fund clients held 24 percent of their assets in cash in June, compared with 19 percent three months earlier, according to the Zurich-based bank's prime brokerage unit.

"People are in cash for the most part and nobody's really taking out any big bets," said Blaze Tankersley, chief market strategist at Bay Crest Partners LLC, a brokerage firm in New York. "Nobody wants to take risk in either direction. It's a weird time in the market."

U.S. stock market trading last month had its steepest June decline in at least 13 years. Daily trading volume for the Standard & Poor's 500 Index of the largest U.S. companies averaged 1.09 billion shares in June, 20 percent less than in May. The 15 percent decrease last year was the second-biggest slump between May and June in Bloomberg data going back to 1997.

David Fuller's view Hedge-fund managers, Wall Street's best compensated and supposedly smartest investors, are dazed and confused.

Reeling from the worst second-quarter performance in a decade, hedge funds have scaled back trading as they struggle to figure out where markets are headed amid sometimes vicious crosscurrents in stock, commodities and other markets, according to brokers and managers.

"There's a degree of being frozen in the headlights, of not knowing what sectors to emphasize, of what securities to emphasize," said Tim Ghriskey, chief investment officer of Solaris Asset Management LLC, a Bedford Hills, New York-based firm with $2 billion in hedge funds and conventional stock funds.

Hedge-fund managers, who oversee $1.67 trillion in assets, are reluctant to put money to work as they are buffeted by a wide range of often conflicting political and economic forces, from fiscal policy in Europe and the U.S., to what regulations will be imposed on the financial-services and energy industries, to the growth prospects in China. In turn, smaller and fewer trades may make it harder for funds to rebound from losses incurred since May, when the industry suffered its worst decline in 18 months.

"For many people, it's a frustrating market given the high volatility and low volumes," said Aaron Garvey, portfolio manager at MKP Capital Management LLC, a New York-based hedge fund overseeing $3.5 billion. "We are seeing strong opposing forces in the markets, which makes generating strong convictions difficult for the medium- and long-term."

Holding Cash

Prime brokers such as Credit Suisse Group AG and JPMorgan Chase & Co. that service hedge funds report that managers are borrowing less money and are sitting on more cash. Credit Suisse's hedge-fund clients held 24 percent of their assets in cash in June, compared with 19 percent three months earlier, according to the Zurich-based bank's prime brokerage unit.

"People are in cash for the most part and nobody's really taking out any big bets," said Blaze Tankersley, chief market strategist at Bay Crest Partners LLC, a brokerage firm in New York. "Nobody wants to take risk in either direction. It's a weird time in the market."

U.S. stock market trading last month had its steepest June decline in at least 13 years. Daily trading volume for the Standard & Poor's 500 Index of the largest U.S. companies averaged 1.09 billion shares in June, 20 percent less than in May. The 15 percent decrease last year was the second-biggest slump between May and June in Bloomberg data going back to 1997.