Concerns over inflation and economic growth resulted in significantly lower equity prices in May. But it wasn’t just stocks that got pounded. Virtually every type of asst class ended the month lower, including commodities, the U.S. Dollar Index, high-yield bonds, gold, and the energy complex. For the well-diversified investor, this is a worst-case scenario, as a host of uncorrelated investments all decided to head south at the same time.
In this type of environment, one might expect hedge funds to lead to the way down. After all, many of them are simply leveraged versions of traditional portfolios. As investment valuations dropped and correlations converged, the logical conclusion would be for a bloodbath for alternative investments.
That was indeed the case for a number of risk-seeking hedge fund strategies such as global macro. But for a host of lower volatility products, May was not as bad as one would expect. The saving grace for many of these funds was resiliency in domestic credit spreads. Even as stock and bond markets lost ground, the yield differential between government and corporate borrowing rates held steady. As a result, leveraged loan portfolios and other rate-sensitive holdings held up surprisingly well in a month characterized by red ink.