Traditional markets bullish
As can be seen from table 1, all hedge fund strategies except for convertible arbitrage posted positive performance in May. Consequently, three out of five strategies now show positive year-to-date returns, as opposed to two in April.
Most traditional markets (for example , stocks, bonds, commodities) were bullish in May, which favoured directional and semi-directional strategies. In particular, thanks to the impressive performance of stock markets, and especially of small caps (ie, +3.00% for the S&P 500 and +6.54% for the S&P 600), the positive returns of long/short equity and event driven funds resumed after two months of disappointing performance.
In the same vein, CTA global funds benefited not only from the stock market rally but also from the up-trends of both the commodity and bond markets. As a result, despite the historically low level of implied volatility (ie, 13.29 as opposed to an average of 22.81 since January 1997, for the VIX contract), these funds achieved their best performance since November 2004, namely +2.50%.
On the other hand, in spite of the extremely low level of implied volatility on the stock markets and the widening of credit spreads (the spread between the yield of bonds rated Baa and Aaa increased by 16% to 0.88%, slightly above its long-term average), equity market neutral funds achieved a positive return. This is unlike the convertible arbitrage funds, which suffered considerably and posted their fifth negative return in a row, resulting in a disappointing year-to-date return of -7.45%. Conversely, thanks to their strong performance persistence, equity market neutral funds show the highest year-to-date return as of May, namely +1.96%.
Mathieu Vaissié, research engineer with the Edhec Risk and Asset Management Research Centre