Hedge funds appear to be on track to deliver returns of 6% or better in the second quarter, their best quarterly performance since 2000, Merrill Lynch analysts project.

Thus far for the quarter, hedge funds returned an average of 2.7% in April and 4.4% in May. The rally this year, following declines of 19% in 2008, has buoyed a number of high-profile hedge funds, including the Tudor BVI Global Fund, up 12.4% year-to-date through May, and the Maverick Fund, up 8.8%.

“I believe there’s been a very big change of mood, and it has come at least three months earlier than I was expecting,” said Christopher Fawcett, chief executive officer of Fauchier Partners, a London hedge fund.

The poor performance has taken a severe toll on hedge funds, which had redemptions every month since May 2008 through May of this year, when they finally netted $3.4 billion. In the fourth quarter of 2008, investors pull $152 billion from hedge funds, and in the first quarter, they took out another $103 billion.

Hedge fund executives believe inflows have returned, even though they are only counting on May figures. That said, they don’t expect flows to be strong.

On top of this, institutional investors are likely to demand transparency, liquidity, lower fees and no side pockets before they return en masse.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.