May A Miserable Month For Hedge Funds

by Phillip Morton, Investors Offshore.com

15 June 2006

Reports that hedge funds endured a miserable month in terms of performance in May have been borne out by the latest set of monthly statistics from a number of hedge fund indices, which track the performance of funds in their databases.

According to the Barclay Group, which actively tracks more than 5,400 hedge funds and managed futures programs, early analysis of last month's results shows that more than 70% of hedge funds lost money in May as equity markets sank.

“Broad declines across equity-based strategies resulted in widespread hedge fund losses in May,” confirmed Sol Waksman, founder and president of the Barclay Group.

“Directional equity strategies took the brunt of the losses, reflecting price declines in the stock markets of industrialized and emerging economies," he went on to add.

The average hedge fund loss last month was 3.09%, according to the Barclay Group. Overall, the Barclay Hedge Fund Index lost 1.78% in May as 11 of its 18 hedge fund indexes lost value. The Emerging Markets Index dropped 4.73%, Technology fell 3.44%, European Equities lost 3.37%, and the Pacific Rim Index was down 3.24%.

However, returns for hedge funds employing short strategies jumped 4.97% for the month.

Meanwhile, Greenwich-Van Advisors LLC, another leading hedge fund index provider, reported last week that Greenwich-Van Global Hedge Fund Index fell 0.51% in May, with emerging market and equity-based strategies also posting big losses in May, although hedge funds with long positions in gold, technology and Japanese securities were hit hardest.

However, Wade McKnight, Vice President of Greenwich-Van, has pointed out that hedge funds still significantly outperformed most traditional benchmarks. Approximately 80% of reporting hedge fund managers beat the S&P 500 (which fell 2.88% in May - its worst month since December 2002), while roughly half delivered a positive result.

Other major indices that lost ground last month included that Dow Jones Industrial Average, which fell by 1.75%, and the NASDAQ Composite Index, which dropped by more than 6%.

The Hennessee Hedge Fund Index, which is calculated from a sample of 1,000 hedge funds in the Hennessee Group LLC database, fell by 1.15% last month.

According to Hennessee, May was a troublesome month for hedge fund managers on both sides of the portfolio, as the beginning of the month saw momentum driven gains, hurting the short book, while the latter half of the month saw large drawdowns, negatively affecting the long side of the book.

While volatility increased substantially last month - something that managers have been waiting to take advantage of - Hennessee observed that the overriding concerns of global inflation and future rate hikes created a sharp mid-month downturn, making it difficult for managers to recover incurred losses.

As a result, the Hennessee Long/Short Equity Index decreased 1.52% in May, while the Global/Macro Index decreased 2.93%.

However, convertible arbitrage hedge fund managers posted another month of returns, up 0.69% (6.1% year to date) as the Hennessee Arbitrage/Event Driven Index returned 0.53% in May.

Recommended