May proved a choppy month across asset classes with investor attention focused on issues such as US growth concerns and the Greek solvency question.
The US Dollar index was up 2.4 per cent, US Treasuries and German Bunds were down, equities were positive in the US and Japan, while Europe and the emerging markets were mixed with the latter suffering the negative impact from the strong US dollar.
Against a choppy market backdrop, hedge funds were broadly positive in May as reflected by the HFRX Global Hedge Fund index up 0.3 per cent. At the strategy level, three of the four main approaches posted positive performance with global macro and event driven leading the way at 0.7 per cent and 0.5 per cent, as measured by the HFRX Macro/CTA index and HFRX Event Driven index, respectively. Some equity hedge managers struggled with the choppy equity market moves during the month and the HFRX Equity Hedge index was down 0.2 per cent. All returns stated in US dollar terms.
The upward trajectory of global macro strategies was largely driven by a resumption in trends from earlier in the year according to Anthony Lawler, portfolio manager at GAM. "The positions driving positive macro strategy performance were typically not new themes, rather trades such as long the US dollar and tactically long equities in the US, Japan and parts of Europe, with smaller positions short US Treasuries and German Bunds also contributing for some."
In event driven strategies investors continued to be rewarded, although crowding is a concern, says Lawler. “We see continued high levels of corporate activity creating catalysts for investors in event driven and special situation names. Activist investors who are willing to push for change are often being rewarded, as are the event investors looking for company-led corporate activity to drive shareholder value. Crowding remains a risk to this strategy as we see event names being widely held, even by investors who historically have not been involved with these situations.”
Equity hedge performance was slightly negative in May and investors reduced exposures, adds Lawler. “Gross and net equity exposures were trimmed in May as uncertainty on US growth and European stability caused some investors to pause. We continue to see opportunities in long / short equity and exposures remain at healthy levels. We are mindful that current global equity valuations are a headwind to the level of expected returns for long equity positions versus historical expectations. If you accept that valuation levels are likely a headwind for long-only equities too, and with dispersion within equities increasing, we continue to prefer equity hedged positioning over long-only equity positioning."
