HFR: Hedge Funds Book Third Consecutive Advance in May

Jun 8 2016 | 11:13pm ET

Hedge funds booked their third consecutive month of gains in May as the U.S. dollar rose in anticipation of higher U.S. interest rates and fears of a UK departure from the Eurozone rose, according to the latest data from Hedge Fund Research.

The HFRI Fund Weighted Composite Index gained +0.35 percent for the month, bringing the measure’s YTD performance into the green by +0.74 percent. The company’s companion asset-weighted index, the HFRI Asset Weighted Composite Index, was likewise positive for the month, adding +0.26 percent. The HFRI family of indices is designed to capture the breadth of hedge fund performance trends across all strategies and regions.

May’s gains were led by strong performance in Event Driven strategies, Relative Value Arbitrage and Equity Hedge strategies, partially offset by declines in Macro. All four main hedge fund strategies are now positive for 2016, according to HFR.

The HFRI Event Driven Index, which advanced +1.3 percent on accelerated M&A activity, brings the rolling three-month gain to +6.5 percent and leading all strategies with a YTD gain of +2.5 percent. Event Driven sub-strategy May performance was led by the HFRI ED: Distressed Index, which advanced +2.1 percent, and the HFRI ED: Special Situations Index, which added +1.9 percent. Both of these sub-strategies have generated strong recent performance, with gains of +7.5 and +9.0 percent, respectively, over the trailing three month period, bringing YTD gains to +3.1 and +4.1 percent, respectively. 

Meanwhile, the HFRI Merger Arbitrage Index added +0.9 percent in May, while the HFRI Activist Index declined -0.4 percent.

Fixed income-based Relative Value Arbitrage strategies also gained in May, as U.S. yields rose in anticipation of near-term rate increases by the Federal Reserve; the HFRI Relative Value Index advanced +1.1 percent 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 percent on exposures to Energy Infrastructure Partnerships and Real Estate. The HFRI RV: Convertible Arbitrage Index advanced +2.0 percent for the month, while the HFRI Credit Index added +1.0 percent. 

Equity Hedge funds also gained for the month, with the HFRI Equity Hedge Index adding +0.8 percent. Equity Hedge sub-strategy performance was led by Energy and Technology exposures, with the HFRI Energy/Basic Materials Index advancing +2.8 percent, while the HFRI Technology/Healthcare Index gained +2.3 percent. 

Following a decline of -13.7 percent in 2015, May represents the fourth consecutive positive month for the Energy/Basic Materials Index, which has gained +16.8 percent during the period, leading all sub-strategies with a YTD return of +12.6 percent.

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 percent in May, the third consecutive monthly decline after strong gains at the start of the year, paring YTD performance to +0.4 percent. 

"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," stated Kenneth Heinz, president of HFR, in a statement. "Hedge fund performance has continued to improve through a challenging environment for allocators, dominated by generally-flat equity markets, near zero interest rates and inverted swap spreads.”

“Despite these [factors], near-term catalysts such as Brexit and the Fed complement an already opportunity-rich landscape,” Heinz continued. “They 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."

Established in 1992, HFR produces the HFRI, HFRX and HFRU Indices, the industry’s most widely used benchmarks of global hedge fund performance. HFR calculates over 100 indices of hedge fund performance ranging from industry-aggregate levels down to specific, niche areas of sub-strategy and regional investment focus.

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