Despite the poor returns of a long/short equity strategy last year, stock picking is the area in which to make the best money in the current environment, according to a bold prediction from fund of hedge fund manager Fauchier Partners.

Success however, requires a change in thinking on the part of fund managers.

"Last year, understandably, the market's preoccupation was not with fundamentals - things like earnings and cash flows and valuations. Everyone was primarily concerned with big macro factors like the Eurozone crisis, the US debt ceiling and whether China was going to have a hard or soft landing," said Dan Higgins, chief investment officer at Fauchier.

"We found ourselves in a market very sentiment driven, which made life very difficult for those trying to extract returns from the market on the basis of fundamentals."

Higgins points to this as the reason why many institutional investors are keen to put their money in funds which were the relatively high performers last year - global macro, fixed income and relative value funds.

"Markets may well be driven by politics and sentiment for some time to come. We agree with that, but think that the sorts of hedge fund managers we know in this area can make some very good returns even if we stay in this kind of risk on/risk off environment," Higgins argues.

Fauchier has taken the approach of readjusting the time horizon and method on which they base manager decisions.

"We all need to assume we are in world of higher short term correlations and that tells us that fundamental investing over a shorter term time horizon is very hard, because it is not fundamentals that have been driving prices over short term," said Higgins.

"In order to succeed and take advantage of dispersion rather than be a victim of correlation in the short term, you cannot be over diversified."

"Any stock picker that has 100 - 150 names in their portfolio will have mathematically very little chance of playing for the big moves - they will be stuck in the middle."

Fauchier has removed from its portfolio such 'diversified' managers, instead replacing them with hedge funds that take quite high conviction, concentrated bets in areas of dispersion with up to 12% positions in individual stocks.

To accommodate the volatility that will naturally accompany these managers, position-level risk is diversified at the fund of fund level.

"You would not want to invest directly as an institutional investor in one of these funds - it could be quite a volatile ride," said Higgins.

"A lot of the funds we have been getting out of have been getting direct allocations from investors who think they can go to a one stop shop for their equity long/short exposure. We think they're likely to be very disappointed because ultimately they're with generalists who are not operating in the areas of dispersion," Higgins said.