May was marked by heightened risk aversion in the markets due to weak US economic data, intensifying concerns about the European debt crisis and political uncertainty in Europe. Many managers had indicated pessimistic views before May and their positions to that effect led to significant outperformance of 8.08% during the month. Investor sentiment remained on the edge from the start of the month and as political deadlock in Greece and concerns about Spanish banks led to sell-offs in equity markets and a weakening Euro.
Hedge funds in all regions witnessed negative returns for the month, albeit to a much lesser extent than global markets. European and Latin American hedge funds provided the most outperformance during the month, 11.79% and 12.04% respectively. Managers were able to reign in the losses by active hedges against currency declines and cautious portfolio positions. Losing positions included exposure to sectors linked to global growth such as energy, materials and financials. Positions in consumer goods, telecommunications and media proved to be helpful for most managers. North American and Asia ex-Japan hedge funds also registered losses of 1.77% and 3.43% respectively, beating their respective market indices by 4.50% and 7.41% respectively. The losses were primarily driven the by declining employment data from the US and reports of a slowdown in China as shown by slowing industrial production, falling trade and retail sales numbers respectively.
Most hedge fund strategy indices ended the month in negative territory, with long/short equity managers suffering the most losses. The Eurekahedge Long/Short Equity Hedge Fund Index was down 3.41% in May as global equity markets suffered declines through the month. The S&P500 lost 6.27%, the Tokyo Topix was down 10.90%, the FTSE100 declined by 7.27% while the Hang Seng finished lower by 11.68%. A number of managers also reported losing value on the Facebook IPO, showing that hedge funds were active participants in the highly anticipated public offering.
CTA/managed futures funds delivered excellent returns of 2.60% led by black box/quantitative trading managers. Trend-followers with long exposure to bonds and the USD, as well as those with short exposures to base metals and other commodities also reported gains for the month. Arbitrage hedge funds were up 0.26% with volatility arbitrage managers reporting gains of 1.67% on average.