Hedge funds show strong performance in May

Despite some institutional and sovereign fund investment management houses, such as Abu Dhabi Investment Authority, reducing their exposure to hedge funds, alternative asset managers recorded a strong performance in May. The Eurekahedge Hedge Fund Index rose by an impressive 2 per cent during the month. Hedge fund managers recorded good returns from equities. The MSCI World Index rose by 1.1 per cent in May. Continued good returns were derived from commodities, particularly crude oil and gas. A slightly stronger US dollar also supported gains. European managers recorded their best performance to date, up by 2.7 per cent on the month. Eastern European and Russian managers returned 5.7 per cent during the month. Healthy gains from commodities, as well as from long and short exposure to the region's equities were achieved. Latin American invested managers, up by 2.5 per cent, benefited from exposure to Brazil. Gains in equities in Brazil and Argentina, combined with the strengthening of domestic currencies and soaring commodity prices, underpinned returns. The MSCI Latin America Index was up by a high 9.1 per cent. MSCI's Brazilian index returned a substantial 11.4 per cent on the month. Stocks in Argentina fared well too, posting double-digit gains. North American managers were up 2.5 per cent, despite slower growth in the US economy and weaker economic news on inflation and consumer spending. Managers in the region profited from both long and short exposure to regional equities, and from currencies (shorting the yen and euro against the marginally stronger US dollar) and commodities. In North America, the S&P 500 touched a four-month high during the month, but declined from that level, to close the month up 1.1 per cent. Asian managers, particularly those allocating to Asia ex-Japan, were among the worst performers in May; the Eurekahedge Asia ex-Japan Hedge Fund Index finished the month flat to negative. This was due to major equity markets such as those in China and India seeing losses on a monthly basis, reflecting concerns on inflation. Exposure to Korea and Taiwan saw weakness, while managers investing in Australia made good gains from regional equities, commodities and currencies. Japanese stocks rose by 3.6 per cent partly on the back of the weaker yen, with small- and mid-caps outperforming their larger-caps counterparts during the month. The fixed-income markets had a challenging month due to higher short-term rates. This was due to widespread expectations that central banks, including the Federal Reserve and the European Central Bank, would raise their respective benchmark rates to combat with rising inflation. The yield on the US 90-day Treasury bill rose by 51 basis points during the month. Arbitrage and Relative Value Hedge Fund indices were up 0.8 per cent and 1.6 per cent respectively in May. Managers of both strategies made good gains from convertible arbitrage activity. A slight improvement in mergers and acquisitions activity gave trading opportunities. US relative value managers returned 4 per cent. Most gains were realised from convertible arbitrage trades, particularly credit-sensitive convertibles. A sharp increase in treasury yields aided strategies. Some statistical arbitrage pair trades across the banking, infrastructure and energy sectors proved profitable in the Asia-Pacific region. Long/short equity managers had a strong month, rising by 2.4 per cent. North American funds were up 2.9 per cent. Managers in the region made gains from long exposure to technology. Stocks across the industrial, materials and real estate sectors were down on the month, thus proving profitable to short sellers. The European index for the strategy was up 2.3 per cent, with the highest returns coming from managers allocating to the Eastern European region, up by 6.7 per cent. Managers benefited from the performance of energy and material-related stocks and from shorting consumer-related stocks which were adversely affected by the increase in material costs. Long/short managers allocating to Australia and New Zealand were up by a hefty 5.4 per cent, against an increase of 1.9 per cent in Australian stocks and a 0.1 per cent decline in the MSCI New Zealand Index. Long exposure to the Australian energy sector, and shorts in the Australian real estate sector proved profitable. Event Driven Hedge Fund managers benefited from special situations such as the withdrawal of Microsoft's bid for Yahoo, and the re-negotiation in the transaction price for the buyout of Clear Channel communications. Australia event driven hedge funds gained from special situations including the proposed merger between Westpac and St. George Bank. Latin American event driven players saw favourable pair trades in the energy, telecom, financial and steel sectors. Fixed-income managers recorded flat returns in May, due to higher short-term interest rates and tighter credit spreads. North American managers were up 1 per cent, as short po