Hedge funds posted gains for the third consecutive month in May, as the US Dollar strengthened in anticipation of higher US interest rates, as well as an increasingly uncertain outcome of the upcoming UK referendum (Brexit).
The HFRI Fund Weighted Composite Index (FWC) gained +0.4 per cent for the month, according to data released today by HFR. Strong performance in Event Driven strategies was complemented by gains in Relative Value Arbitrage and Equity Hedge strategies, which were only partially offset by declines in Macro; all four main hedge fund strategies are now positive for 2016. The May gain brings YTD performance for the FWC to +0.74 per cent, topping most equity market indices, including the Nasdaq, Nikkei, FTSE, DAX and Shanghai Composite, while narrowly trailing the S&P 500 and DJIA. The HFRI Asset Weighted Composite Index posted a similar gain of +0.3 per cent for the month.
May performance was led by the HFRI Event Driven Index, which advanced +1.3 per cent on accelerated M&A activity, bringing the rolling three-month gain to +6.5 per cent and leading all strategies with a YTD gain of +2.5 per cent. Event Driven sub-strategy May performance was led by the HFRI ED: Distressed Index, which advanced +2.1 per cent, and the HFRI ED: Special Situations Index, which added +1.9 per cent. Both of these sub-strategies have generated strong recent performance, with gains of +7.5 and +9.0 per cent, respectively, over the trailing three month period, bringing YTD gains to +3.1 and +4.1 percent, respectively. The HFRI Merger Arbitrage Index added +0.9 per cent in May, while the HFRI Activist Index declined -0.4 per cent.
Fixed income-based Relative Value Arbitrage strategies also gained in May, as US yields rose in anticipation of near-term rate increases by the Federal Reserve; the HFRI Relative Value Index advanced +1.1 per cent for the month. RVA sub-strategy performance was led by the HFRI Volatility Index, which gained +2.1 percent, and the HFRI RV: Yield Alternatives Index, which gained +2.0 per cent on exposures to Energy Infrastructure Partnerships and Real Estate. The HFRI RV: Convertible Arbitrage Index advanced +2.0 per cent for the month, while the HFRI Credit Index added +1.0 per cent.
Equity Hedge funds also gained for the month, with the HFRI Equity Hedge Index adding +0.8 per cent, while the HFRI Equity Hedge (Asset Weighted) Index gained +1.4 per cent. Equity Hedge sub-strategy performance was led by Energy and Technology exposures, with the HFRI Energy/Basic Materials Index advancing +2.8 per cent, while the HFRI Technology/Healthcare Index gained +2.3 per cent. Following a decline of -13.7 per cent in 2015, May represents the fourth consecutive positive month for the Energy/Basic Materials Index, which has gained +16.8 per cent during the period, leading all sub-strategies with a YTD return of +12.6 per cent.
Macro hedge funds declined for the month, as losses across quantitative, trend-following CTA exposures offset gains in fundamental, Discretionary Thematic strategies, while Currency and Commodity exposures were mixed. The HFRI Macro Index fell -1.1 per cent in May, the third consecutive monthly decline after strong gains to begin 2016, paring YTD performance to +0.4 per cent. The HFRI Macro: Systematic Diversified/CTA Index declined -2.1 per cent for the month, with negative contributions from positions in Metals & Currencies, paring the YTD gain to a modest +0.1 per cent. The HFRI Macro: Discretionary Thematic Index advanced +0.4 per cent in May, while the HFRI Currency Index fell -0.7 per cent.
“Hedge funds posted gains for the third consecutive month in May, effectively navigating uncertainty associated with the upcoming Brexit vote, as well as shifting expectations of the timing and frequency of near term rate increases by the Federal Reserve,” says Kenneth J Heinz, President of HFR. “Hedge fund performance has continued to improve through a challenging environment for allocators, dominated by generally-flat equity markets, near zero interest rates (negative in many regions) and inverted swap spreads. Despite these, near-term catalysts such as Brexit and the Fed complement an already opportunity-rich landscape and are likely to contribute to an extension of recent gains through mid-2016, with hedge funds providing both performance leadership and portfolio protection toward achievement of full-year return targets.”