Ah, but you missed the "other things being equal" part. ;) If the markets move as a whole and hedge funds are heavily long on the market, but others are market-neutral, or even short, things are not equal.
Right, but on the whole, you'd expect those all to average out. If the markets move up and hedge funds are long, they're as likely to move down while hedge funds are long, or move up while hedge funds are short.
That is why better hedge funds know when to be long and when to be short. My explanation makes a lot of assumptions for simplification, because it is impossible to know what every hedge fund is doing at every point in time.
