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Hedge funds continue fightback, as equity managers soar amid lockdown-easing and activists seize on dislocation

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Hedge funds are continuing to recover from sharp losses suffered earlier this year, notching up positive returns for the second successive month in May as economies slowly reopen following the coronavirus lockdown, new data from Hedge Fund Research shows.

All long/short equity hedge fund strategies clawed back profits last month, including sector-specialist managers such as technology and materials, while activist and special situations funds are making hay amid widespread global market dislocations.

The HFRI Fund Weighted Composite Index – which tracks the performance of more than 1,400 single manager funds of various strategies globally – gained 2.5 per cent in May, with equity hedge funds and event driven strategies leading the pack.

The rise follows a 4.79 per cent advance in April – the index’s first positive return of 2020 and its biggest monthly rise since the 5.15 per cent gain in May 2009.

But the index remains down some 4.84 per cent year-to-date after hedge fund performance plummeted in Q1 as the coronavirus pandemic impacted global markets.

In equities, the HFRI Equity Hedge Total Index rose 3.88 per cent in May, with all equity-focused hedge fund strategies in positive territory for the month.

Multi-strategy equity funds were up 5.84 per cent, while fundamental growth-focused strategies gained 4.84 per cent. Sector-specialist equity hedge funds were also among the best performers, with technology-focused strategies up 4.26 per cent, energy and materials funds returning 4.13 per cent, managers trading healthcare stocks rising 3.46 per cent.

HFRI’s Event Driven Total Index rose 2.88 per cent, powered by special situations vehicles (up 5.35 per cent), activist hedge funds (4.85 per cent), and credit arbitrage strategies (3.64 per cent), against a backdrop of recovering M&A activity and a step-up in activist campaigns.

Despite the gains, event driven managers remain deep in the red year-to-date, with the total index down 8.68 per cent, with activist strategies having lost close to 17 per cent since the start of 2020.

Elsewhere, hedge funds trading macroeconomic trends experienced mixed fortunes in May, slightly negative at -0.27 per cent for the month, and down 0.71 per cent year-to-date.

Multi-strategy macro managers led the way, rising 1.69 per cent in May, but still down 1.87 per cent for the year. Discretionary thematic macro hedge funds added 1.36 per cent and remain up 1.12 per cent in 2020.

Relative value-focused hedge funds were up 2.45 per cent in May, but have lost more than 5 per cent so far this year. Similarly, emerging markets strategies added 2.77 per cent last month, but have lost more than 7.5 per cent since the start of 2020.

Commenting on the results, Hedge Fund Research president Kenneth J Heinz said investors are likely to make or increase allocations to funds which have demonstrated their ability to weather the prevailing volatile geopolitical turbulence.

“Hedge funds extended recent gains through May as an acceleration of  risk-on sentiment from the March lows drove a surge in the highest beta strategies including activist, special situations, and growth exposures as businesses globally progressed towards reopening and despite social unrest and civil protests across both the US and Hong Kong/China,” Heinz said.

“While recent gains have been compelling, the financial markets environment remains both fluid and opportunity-rich across asset classes, with the tailwinds of policymakers committed to accommodative interest rates and a resurgent retail consumer contrasting against the risk of additional virus impact or destabilising social unrest.”

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