By Jeff Cox, CNBC.com Staff Writer
NEW YORK ( CNBC) -- With bullish projections abounding and money starting to flow out of bonds and into U.S. equity funds, retail investors finally might start finding their way back into the stock market. Mom-and-pop investors have been only marginal players in the market rally of the past 21 months. High-frequency traders and large financial institutions have come to control most trading, with retail players likely only one-quarter or so of actual market volume. So with indications now that the so-called "average" investor is ready to come in from the cold, the question is whether it will even make a difference in the market's direction.
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"We're struggling to explain to the average investor that there's still a lot of risk in this market. They just don't see it," Boyle says. "They say, 'I'm worried about the country, but my 401(k) keeps going up.' There's this disconnect going on." Indeed, 2011 could be the year when fund managers try to make up for last time, regardless of the various risk factors in the marketplace and the economy. The previous year was a disaster for the industry -- the worst ever, in fact -- with just one in five fund managers beating their benchmarks, according to Bank of America Merrill Lynch Global Research. Strong correlation of movements between various asset classes and the outperformance of small-caps and high beta, or risky stocks, made it difficult for managers to hedge and diversify, despite the fairly robust gains of the market overall. "We believe that stock pickers could make a comeback in 2011," Savita Subramanian, BofAML quantitative strategist, said in a research note for clients. "Clustered performance has begun to abate as clarity has improved on the macro front, and performance spreads appear to be bottoming, suggesting a better environment for stock pickers." Whether that makes life easier for individual investors is unclear. High-frequency traders aren't going anywhere, and market distortions from Federal Reserve liquidity programs are likely to remain as well while the central bank continues with its quantitative easing policy. "If the money to boost the US stock market capitalization by almost $9 trillion from the March 2009 lows did not come from the traditional players, it had to come from somewhere. We believe that place is the Fed," TrimTabs analysts said in a research note. "By funneling trillions of dollars in cash to the primary (bond) dealers in exchange for debt, the Fed has given Wall Street lots of firepower to ramp up the prices of risk assets, including equities." Whether that is sustainable and leads to an influx of money from retail investors remains to be seen. TrimTabs predicts the market bubble will burst once the Fed turns off the money spigot. With the events of the past two years still fairly fresh in investors' minds, that could once again chase retail players from the market, though such an event does not appear imminent. "You have a perfect storm, with the high-frequency desks continuing, the pension funds throwing money in, the new 401(k) allocations coming in. So you do have free cash flow," Boyle says. "That's part of it. But I feel it's a fool's game at this point." -- Written by Jeff Cox of CNBC