Hedge Funds Ride Out Equity Losses
Thursday, June 10, 2010

Hedge funds as measured by the Greenwich Global Hedge Fund Index (GGHFI) ended last month in the red, although the index fell by a fraction of the losses experienced by global markets in May.

The GGHFI shed 2.25% compared to global equity returns in the S&P 500 Total Return -7.99%, MSCI World Equity -9.91%, and FTSE 100 -6.57% equity indices. 28% of constituent funds in the GGHFI ended the month with gains.

“While the majority of hedge fund strategies declined in May, the magnitude of the loss is substantially less than that of global equity returns,” notes Clint Binkley, Senior Vice President.

“Historically, the bulk of hedge fund alpha has been generated in bear market moves. Investors have come to expect that hedge funds will emphasize capital preservation over outsized returns. The results that we see in May confirm this expectation and demonstrate the value proposition for investing in this asset class," Binkley added.

Long/Short Equity managers were the hardest hit among hedge funds in May as the Greenwich Long/Short Hedge Fund Index lost 4.31% during the month.

On the other hand, Directional Trading funds turned in excellent results in May, posting the smallest loss of all hedge fund strategy groups. Nearly 60% of Macro managers posted positive results, gaining 0.70% on average. Short positions in the Euro and profitable fixed income positions helped propel these funds in May. Managed Futures funds lost a respectable 1.22% as commodities declined with equity markets during the month. Discretionary traders performed slightly better than systematic models.

On a regional level, hedge funds investing exclusively in developed markets performed markedly better than emerging market funds in May. The Greenwich Developed Market Composite Index dropped by 1.79% as compared to a loss of 6.12% for the Emerging Market Composite Index. In developed markets, funds investing in Asia suffered the most, falling 3.11%, followed by European, North American, and Globally-focused funds, which lost 1.88%, 1.76%, and 1.62%, respectively.

Emerging market hedge funds fell in every region, but European managers posted the most disappointing results, losing 10% on average as the European sovereign debt crisis continued to take its toll on debt and equity markets.