Amanda Cantrell at CNN/Money on rising equity exposure at long/short equity hedge funds. As long/short hedge funds get systematically longer it makes them more vulnerable to a marke downturn and less attractive as portfolio diversifiers.

Markov CEO and founder Michael Markov analyzed the returns for long/short hedge funds using both the CSFB/Tremont index and Hedge Fund Research’s index and compared them to returns from the S&P 500. The research found that the levels of net long exposure in the funds studied are now back to pre-Sept. 11 levels.

“One may conclude that it took about two years of solid market gains for hedge fund managers to become more optimistic and increase their net exposure in 2004-2005,” Markov wrote.

It is believed that the growth in the number and assets under management by hedge funds is having a direct and indirect role on this rising equity exposure. Less experienced managers may feel less comfortable on the short side. In addition, rising demand for short exposure has made more stocks “hard to borrow.â€? This forces managers to use ETFs to gain short exposure.

Dew said he believes that rising net exposures in long/short equity funds are not necessarily a bad thing — as long as these managers apprise their investors of the types of risks their investment style carries.

“As long as managers do what they say and say what they do, I don’t think it’s an issue. If the manager deviates from that, that’s when you get into style drift, and that’s a big problem,” he said, referring to managers who deviate from their stated strategy.

This speaks to the issue of transparency and the expectations of investors. Thomas Kostigen at notes the phenomena of hedge funds using loopholes to avoid SEC registration and whether the market needs more hedge fund transparency.