Hedge Fund Performance Stutters
Monday, June 13, 2011

Hedge funds as measured by the Greenwich Global Hedge Fund Index showed "pockets of strength" in May, but not enough to prevent the index from sliding by more than 1%.

Long-Short equity funds were unable to make headway during a fairly volatile month for the main equity markets, and this strategy made a negative return of 0.97% in May. Managed Futures funds were particularly badly hit last month, losing an average of 3.25%.

Long-Short Credit and Arbitrage funds posted the best returns (0.76%) on the month and this strategy group leads hedge funds on a year-to-date basis, up 5.03%.

Developed Market funds were less impacted from global sell-off than Emerging Market funds, and the Greenwich Composite Regional indices fell by 1.18% and 1.99%, respectively.

Overall, the GGHFI fell by 1.2% in May. By comparison, the S&P 500 Total Return fell 1.13%, the MSCI World Equity lost 2.45%, and FTSE 100 was down 0.89% last month. Just over one-third (36%) of constituent funds in the GGHFI ended the month with gains.

“Market Neutral strategies demonstrated their worth in May,” notes Clint Binkley, Senior Vice President. “Economic uncertainty took its toll on equity markets and Directional strategies in general during the month but managers that were less beta sensitive came out ahead. We expect a growing number of funds to decrease their net exposure as a result of recent volatility.”

Other hedge fund performance trackers also reported losses for the sector last month. The Hennessee Hedge Fund Index declined -0.54% in May, although it remains up 2.86% year-to-date, and early estimates indicate that the Dow Jones Credit Suisse Hedge Fund Index finished last month down by 1.1%.

Despite this performance setback, investors seem to be renewing their faith in hedge funds. Research by Barclayhedge and TrimTabs Investment Research shows that industry assets climbed to USD1.8 trillion in April this year, the highest level since October 2008. This followed heavy inflows of USD17.5bn in April alone.

“Flows are doubtless following performance,” says Sol Waksman, founder and President of BarclayHedge. “The Barclay Hedge Fund Index posted a positive return in each of the eight months ended April, and investors of all stripes are prone to chase a winning streak.”

Multi Strategy funds hauled in USD5.3bn (2.5% of assets) in April, the heaviest inflow of all hedge fund strategies. Macro funds received USD3.0bn (2.6% of assets), the fourth straight inflow, even though these funds have posted a relatively poor return in 2011. Fixed Income funds took in USD1.3bn (0.7% of assets), the eleventh inflow in 12 months.

“The appetite for bonds appears to be insatiable,” notes Vincent Deluard, Executive Vice President at TrimTabs. “Hedge fund investors, ETF investors, mutual fund investors, and speculative traders are piling into the space. This enthusiasm explains why the yield on the 10-year Treasury has plunged to a six-month low."