Reuters - Hedge funds have cut back their bets over a volatile summer for financial markets, worried that big swings in investor sentiment are playing havoc with their carefully-researched trades.

What managers call the "risk-on, risk-off" trade -- where calling a sudden switch to bearish or bullish sentiment is more important than picking undervalued stocks -- has become critical as fears over a double-dip recession suddenly grow or recede.

But it has also led to sizeable losses for some funds.

While some commentators argue equities are cheap, Britain's FTSE 100 index has nevertheless dropped from more than 5,800 in April to less than 4,800 at the start of this month, catching out many long-short equity funds, which tend to be biased towards rising prices.

Macro funds, meanwhile, have been hit shorting the Japanese yen, which has risen against the dollar since early May as investors sought out safe havens, and the euro, which earlier this month began recovering from a six-month bear market that was driven by sovereign default concerns.

"There's no point being a stockpicker right now," said one prime broker who declined to be named in order to speak candidly.

"Liking a company and being right about it is a joke if the world's ending," the broker said, adding that borrowing by equity hedge funds to finance long and short positions had come down since its recent peak at the end of April.

FUNDAMENTALS

Many hedge funds had built up exposure to equities during the first four months of the year, confident that