Hedge fund managers benefit from equity upturn, says index providers

Average hedge fund returns recovered in May on the back of an overall recovery in equity markets during the month, according to index providers Edhec, Greenwich Alternative Investments and HedgeFund.net, although results from emerging market strategies were mixed.

The month was characterised by positive stock market returns, notes the Asset and Risk Management Research Centre of French business school, Edhec, exemplified by the 1.30 per cent return from the S&P 500 - its second consecutive positive return after five months of falling stock markets.

Market volatility fell again, to slightly below 18 per cent, its lowest value since June last year, while the fixed-income market lost money again with a decline of 1.17 per cent for the Lehman Global Bond Index - albeit an improvement on April's performance. Commodity prices continued to set new record highs, climbing by around 9 per cent after an 8 per cent return the previous month.

Against this backdrop, all hedge fund strategies except short selling posted positive returns considerably higher than their historical average. The best performing strategy was long/short equity, as it had been in April, with a return of 2.56 per cent, while the worst return was from short selling with a decline of 1.68 per cent.

The best performance for the year so far is 9.2 per cent for CTA global, but five strategies - convertible arbitrage, emerging markets, event-driven, fixed-income arbitrage and long/short equity - as well as funds of hedge funds are still in negative territory for 2008.

The Greenwich Global Hedge Fund Index returned 2.01 per cent last month, following its gain of 1.59 per cent in April, and is up by 0.49 per cent for the first five months of the year. Of the 1,345 constituent funds reporting to Greenwich in May, 83 per cent ended the month with gains.

'Across the board, hedge funds performed well in May,' says Greenwich Alternative Investments managing director Margaret Gilbert. 'But the real story in comparing year-to-date performance. Hedge funds are positive for the year, compared with the major equity indices which remain negative.'

For the second month in a row, long/short equity managers were the best-performing strategy group, posting a gain of 2.35 per cent. Growth funds showed the highest average gains within the group, while short-selling managers suffered the largest losses.

Directional trading managers, the best performing strategy group so far this year, enjoyed another strong month, returning 2.00 per cent. Futures managers returned 2.23 per cent on the strength of surging commodity markets, and are now up more than 10 per cent for the year.

Specialty strategy managers were the second-best performing strategy group, returning +2.10 per cent on average. Multistrategy managers led with a return of 2.50 per cent, while the market neutral group averaged 1.39 per cent as event-driven managers continued to find opportunities in uncertain markets. All sub-sectors of the market neutral group gained in May, with merger arbitrage and distressed securities managers posting the highest returns of 1.74 and 1.70 per cent respectively.

The HFN Hedge Fund Aggregate Average, an equal-weighted benchmark of all single manager hedge funds and CTA/managed futures products in the HedgeFund.net database, gained 2.27 per cent in May and is now up by 1.08 per cent for the year to date. The database consists of more than 8,000 current hedge funds, funds of funds and CTA products.

Hedge funds seemed able to take advantage of a mid-month rally in equity markets, HFN notes. The average equity-focused hedge fund, represented by the HFN Long/Short Equity Average, returned 3.34 per cent in May, significantly outperforming the S&P 500 Total Return Index with 1.34 per cent. Small and micro cap and technology sector funds posted the best returns with 4.52 and 6.08 per cent.

Trends within commodity prices diverged last month with energy and precious metals prices rising and basic materials prices dropping, helping the HFN Energy Sector Average to gain 3.62 per cent and restore its performance so far in 2008 to 2.77 per cent. In this environment, CTA/managed futures funds returned 2.32 per cent, taking its year to date performance to 10.49 per cent, second only to the mortgage sector.

Performance among emerging markets funds was mixed, with the HFN Emerging Markets Average gaining 1.87 per cent in May but remaining down 1.51 per cent for the year. The HFN Brazil and Russia averages were up by 5.80 and 5.66 per cent respectively, while the China and India averages lost 2.41 and 9.88 per cent. The disparity, HFN says, is down to Brazil and Russia being considered a commodity-driven story, while India and China are thought to be more tied to global economic growth.

Other strategies that performed well last month include funds employing options strategies, which were up 1.85 per cent for the month and 4.56 per cent over the first five months of the year. Mortgage sector funds, which have been able to take advantage of the difficulties in the mortgage sector, gained 2.227 per cent in May and have posted the best aggregate hedge fund results for the year so far of 13.04 per cent.

RBC Capital Markets has reported that the RBC Hedge 250 Index had an estimated net return of 1.72 per cent in May, reducing its year to date decline to 1.05 per cent, while the index's return for April has been finalised at 0.77 per cent. The RBC Hedge 250 Index is an investible benchmark of the performance of the hedge fund industry comprising more than 250 funds, based on a universe of 5,983 hedge funds (excluding funds of hedge funds) with aggregate assets under management of USD1.63trn.

Between its launch on July 1, 2005 and the end of April this year, the index has delivered an annualised net return of 7.70 per cent. The best-performing sectors last month were equity long/short (2.43 per cent), mergers and special situations (2.03 per cent), multistrategy (1.84 per cent), convertible arbitrage (1.76 per cent), equity market neutral (1.66 per cent) and managed futures (1.58 per cent), while the only positive returns for the year to date have come from managed futures (9.31 per cent), macro (3.48 per cent) and equity long/short (0.40 per cent).

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