May proved to be a supportive month across most asset classes, with global equities posting broadly positive returns while bond yields tightened and credit rallied.
Against this backdrop, hedge funds had a positive month with the HFRX Global Hedge Fund index closing up 0.5 per cent in US dollar terms.
GAM portfolio manager Anthony Lawler says he expects the reach for yield by global investors to continue to dominate markets and hedge fund positioning going into June.
"The reach for yield is having a significant impact across markets as pension funds and other investors adjust to a world where rates could stay lower for longer. Investors continue to bid for credit and bonds, creating opportunities for credit and relative value managers. On the equity side, we saw managers increase their gross exposures by the end of May as markets recovered from the March and April rotations to re-focus on fundamentals. Equity valuations are not seen as broadly cheap outside of Europe and we are seeing managers selectively adding European value long exposure while globally adding to long / short conviction trades. For global macro managers, the focus remains on identifying the expected moves in currencies, rates and equities based on different growth rates and interest rate policies, which for now points to US dollar strength, bullish developed rates and waiting on the Japan reflation trade," he says,
At the strategy level some managers are better positioned than others in this environment, with event driven managers leading on year-to-date performance, says Lawler.
"Event driven managers continue to feel tailwinds given the level of announced deals, credit being highly available for balance sheet restructuring or acquisitions, and the generally supportive equity market. We see managers continuing to be fully invested and idea-rich in this space."
Global macro was the top-performing strategy for May, with the HFRX Macro/CTA index up 0.8 per cent in US dollar terms. Lawler noted that these managers have not significantly changed their conviction trades all year.
"Macro had a stronger month, partly on the back of the US dollar strength especially versus the euro, some long interest rates exposure, and tactical longs in equities in Europe and still in Japan. These are by and large the trades that mangers have held for months with just a few tactical changes, including long European rates going into month-end given the expectation for Draghi and the ECB to be dovish in their June meeting," says Lawler.