Buoyant markets and buyouts boost hedge fund returns in May

The hedge fund industry continued to enjoy strong returns in May, according to leading index providers, with strong equity market performance and buoyant merger activity bringing significant gains for equity long/short, global macro and event-driven as well as multistrategy funds, and only short-selling strategies significantly missing out.

Five of the six strategies covered by Dow Jones Hedge Fund Indexes posted net-of-fees gains in May 2007, according to preliminary estimates. With returns of 3.65 per cent, the performance of equity long/short was significantly higher than other strategies, taking its gains to 10.84 per cent for the year and displacing merger arbitrage as the top-performing strategy of 2007.

Nevertheless, merger arbitrage finished the month with a gain of 1.94 per cent, pushing its returns so far this year to 9.53 per cent. Event-driven gained 1.90 per cent and is up 7.67 per cent for the year, while distressed securities posted a return of 0.64 per cent for the month and 6.57 per cent for the year.

With a return of just 0.03 per cent, equity market neutral was nearly flat in May, while convertible arbitrage lost 0.36 per cent for the month. With an identical annual cumulative gain of 1.70 per cent, both of the strategies are the laggards for 2007.

The RBC Hedge 250 Index had an estimated net return of 1.70 per cent, bringing the year-to-date return of the index to 6.35 per cent, following a finalised return of 1.66 per cent in April. The index, an investible benchmark of the performance of the industry, comprises more than 250 actual hedge funds and is based on a universe currently consisting of 5,755 single-manager funds.

The biggest gains were enjoyed by mergers and special situations, up 2.73 per cent in May and 11.19 per cent for the year, and managed futures, which gained 2.69 per cent over the month but only 4.93 per cent so far in 2007. Multi-strategy funds saw a return of 1.78 per cent in May and are up 8.21 per cent for the year.

Equity long/short and macro both posted 1.79 per cent for the month and 6.79 per cent and 4.59 per cent respectively over the first five months of 2007. Fixed-income arbitrage was the worst performer, gaining a bare 0.05 per cent in May and just 2.15 per cent since the beginning of the year.

The Credit Suisse/Tremont Hedge Fund Index was up 2.31 per cent for the month, according to Oliver Schupp, president of Credit Suisse Index Co., thanks to the underlying strength of the US and global economies. 'The U.S. economy rebounded in May as job creation was double the April figures, unemployment held steady, consumer confidence rebounded from an eight month low, and the manufacturing sector grew at its fastest rate in over a year,' he says.

'In light of this, inflation fell to a figure closer to what the Federal Reserve may consider acceptable. Although Chinese equities dropped significantly at the end of May due to a higher tax on securities transactions, other global equity markets remained relatively unaffected and the European Dow Jones Stoxx 600 closed on a high not reached since September 2000.

'Overall, this market environment has been favourable for the majority of hedge fund strategies. Managed futures in particular were up 5.13 per cent in May as managers generally profited from the strong performance of medium term CTAs on the back of strong M&A activity, a positive economic outlook and a strong stock market.' However, managed futures is only up 4.22 per cent so far in 2007 following more difficult conditions earlier in the year.

Other strong performers among the 10 sub-strategies of the Credit Suisse/Tremont Hedge Fund Index, which is up 7.86 per cent so far in 2007, include event-driven, which has gained 3.24 per cent for the month and 10.0 per cent for the year, long/short equity, up by 2.31 and 9.25 per cent respectively, and multi-strategy funds, which have enjoyed gains of 2.29 per cent and 7.94 per cent. By contrast, equity market neutral and fixed-income arbitrage both gained less than one per cent last month, while dedicated short bias funds lost 2.20 per cent and are down 3.31 per cent for the year.

The Credit Suisse/Tremont Hedge Fund Index, which encompassed 438 funds with some USD555bn in assets at the end of May, serves as the basis for the Credit Suisse/Tremont Investable Hedge Fund Index, which was up an estimated 2.03 per cent net for last month, following a confirmed performance for April of 1.61 per cent. The index returns are net of a 0.07 per cent calculation fee.

In the benign economic environment, all the strategies tracked by the Edhec Hedge Fund Indices except short selling posted positive returns, and the returns were clearly above the historical average level for their respective strategy. The best performer was the emerging markets index with a return of 2.79 per cent and 9.3 per cent for 2007 to date, which Edhec says can be explained by the good performance of equity markets, strong currencies and tightening bond yields in most major emerging economies.

Other strong performers in the Edhec indices were long/short equity, which gained 2.39 per cent in May and showed an increase of 7.8 per cent for the year, CTA global/managed futures (up 2.32 and 3.0 per cent respectively), event-driven (2.13 and 10.0 per cent), global macro (2.07 and 4.7 per cent) and funds of funds (2.05 and 7.0 per cent). The only Edhec strategy in negative territory was short selling, which lost 1.97 per cent in May and is down 5.8 per cent for the year.

Managed futures rose for the second month in a row, gaining 1.37 per cent in May, according to flash estimates from the Barclay CTA Index. 'Inflation concerns in the US and abroad drove global bond prices lower this month,' says Sol Waksman, founder and president of the Barclay Group. 'Although bond prices declined throughout the month, global stock markets continued higher. Interest rates are still relatively low and we appear to be in a merger and acquisition boom driven by private equity.'

Seven out of Barclay's eight CTA indices gained ground in May. The diversified traders index was up 1.76 per cent, systematic traders rose 1.54 per cent, and the financial and metals traders index gained 1.46 per cent. The agricultural traders index was up 1.40 per cent in May, following losses through the first four months of 2007. 'Corn, the newest member of the energy complex, saw its price drop during the month, as did prices in the other energy markets,' Waksman says. 'Soybeans, on the other hand rallied all month long.'

The Barclay BTOP50 Index, which monitors performance of the largest commodity trading advisers, rose 2.15 per cent in May, building on a 2.34 per cent gain in April, and is now up 2.71 per cent for the year. The Barclay CTA Index is back in positive territory for 2007, up 0.73 per cent for the five months to May.

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