Hedge funds posted their seventh consecutive monthly gain in May and the 11th gain in the last twelve months as strong performance in equity hedge and event driven strategies offset weakness in Macro and CTA strategies, according to data released by the Hedge Fund Research (HFR).
The broad-based HFRI Fund Weighted Composite Index advanced +0.5% for the month, led by a gain of +1.8% for the HFRI Equity Hedge Index.
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Equity Hedge, the largest strategy area for the equally-weighted HFRI Composite, saw gains distributed across most sub-strategies, with fundamental value, sector technology and fundamental growth advancing +2.5%, +2.4%, and +1.1%, respectively. Meanwhile, Short Bias funds detracted from overall Equity Hedge performance, declining by -3.2%.
The HFRI Event Driven Index added +1.7% in May, its 12th consecutive monthly gain, powered by the continuation of the dynamic market for corporate transactions. The HFRI ED: Distressed/Restructuring Index advanced +1.7% for the month, while funds specialising in special situations and activist strategies gained +1.7% and +4.9%, respectively.
Fixed Income-based relative value arbitrage, the largest hedge fund strategy area by capital with US$640 billion in AuM, also posted its 12th consecutive monthly gain and the 46th gain in 53 months since the onset of the financial crisis in December 2008. Despite the sharp rise in bond yields, the HFRI Relative Value Index advanced +0.06% in May, led by a gain of +1.9% in the HFRI RV: FI -Convertible Arbitrage Index. Credit multi-strategy funds and yield alternative strategies gained +1.7% and +0.4%, respectively, in May.
The HFRI Macro/CTA Index declined by -1.5% for the month, on weakness in quantitative trend-following CTA and commodity-focused strategies. The HFRI Systematic Diversified CTA Index fell -2.2%, reversing a similar gain from the prior month, with negative contributions across equity, fixed-income and commodity exposures. Partially offsetting these declines, discretionary macro strategies added +0.2% while performance was mixed across currency-focused macro strategies.
"The performance gains seen in May are significant because in contrast to prior months, when risk-on sentiment and powerful equity market beta globally drove performance, May was dominated by a sharp reversal in the Nikkei, concerns about the impact of curtailment of quantitative easing by the US Federal Reserve and a sharp rise in bond yields globally," said Kenneth J. Heinz, president of HFR.
"Risk-on sentiment quickly reversed to risk-off into month-end and while certain quantitative, trend-following strategies were adversely impacted by these reversals, strong positioning and effective hedging across equity, event and arbitrage drove gains across the HFRI indices, underscoring the powerful dynamic of strategic diversification inherent in investible indices and across heterogeneous fund strategies.
"While the extent and continuation of equity market gains may be unclear at this point, the eventual curtailment and extraction of stimulus measures is likely to contribute to a challenging, volatile and uncertain environment, and hedge funds are tactically and strategically positioned to generate performance and preserve gains through just these sorts of conditions."
