Hedge Funds Record 7th Monthly Gain in May

Second half performance drivers: Trump/Yellen and volatility reversal trades

Hedge funds extended their run of positive performance to seven months in May, and to 14 of the 15 trailing months, Hedge Fund Research reported this week.

The HFRI Fund Weighted Composite Index gained 0.5% for the month, bringing performance to 3.5% for the year to date.

“Hedge funds extended strong performance in May led by technology, currency and event-driven strategies, as [Emmanuel] Macron prevailed in the French election, emerging market volatility spiked and receded intra-month and equity-implied volatility fell to historical lows,” HFR’s president Kenneth Heinz said in a statement.

Macron’s victory in the May 7 second round election brought sighs of relief across Europe.

“As a result,” Heinz continued, “the thematic drivers of performance for 2H17 have shifted to include not only the Trump and Yellen trades, but also the volatility reversal trade and the increased risk associated with terrorism and cybersecurity. Managers positioned tactically long and short which are able to navigate both rising and falling volatility market cycles are likely to lead industry performance in 2H17.”

First quarter investor inflows helped push total hedge fund industry capital to $3.1 trillion, HFR reported in April.

However, wealthy individual investors appear to be less enamored with the sector than their institutional counterparts.

May Performance

Event-driven strategies led gains in May, advancing 0.6% for their 11th consecutive monthly gain. Year to date, event-driven is up 3.9%.

The event-driven special situations and multi-strategy sub-indexes gained 1.3% and 0.7%. These positive returns were partially offset by an 0.3% drop in the distressed/restructuring sub-index.

Equity hedge strategies ended May up 0.5% as equity-implied volatility fell to a historic low, with performance led by exposures to technology, quantitative directional and multi-strategy, up 2.7%, 1.7% and 1.3%, respectively.

On the losing side, the energy sub-strategy was down 2.4% and health care was down 1.5%.

Macro gained 0.5% in May, as the Euro and Swiss Franc advanced following the French election and as implied equity volatility declined to historical lows.

The strategy’s performance was led by the HFRI currency sub-index, which vaulted 3.5%, the strongest monthly return since its inception; year to date, it is up 8.2%. Besides contributions from euro, Swiss Franc, New Zealand dollar and Korean won, the sub-index also had strong contributions from exposure to digital currencies.

The HFRI macro: systematic diversified/CTA sub-index added 0.7% in May.

Fixed income-based relative value arbitrage strategies eked out a 0.1% gain in May, extending to 15 the streak of consecutive monthly gains. Asset-backed and volatility funds led with gains of 0.9% and 0.7%.

Partially offsetting these monthly gains, the yield alternatives sub-index fell 3% on losses in energy infrastructure/MLP exposures.

In a volatile month, emerging markets strategies advanced 0.8%, with strong gains in the Middle East and emerging Asia partially offset by declines in Latin America and Russia.

The HFRI MENA sub-index jumped 2.6% in May, while the Asia ex-Japan sub-index added 2.2%, bringing year-to-date performance to 6.2% and 13.3%. Meanwhile, the HFRI Latin America sub-index was down 2.9% for the month, and the Russia/Eastern Europe sub-index ended down 1.3%.

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