Market movements and fund returns in May were largely a continuation of those seen in April as M&A volume and large capital flows provided the fuel for a global equity rally kick-started by strong earnings data. Also of note is the resilience of several markets to negative news over the past few months.

Amid a stable ‘more of the same’ scenario, global equities got a further boost in May from increased M&A activity, stronger-than-expected US economic data, and no dearth of liquidity; reflecting this, the MSCI World index rose 3.4% during the month.

Positive economic data emanating from the US led to diminishing expectations of an interest rate cut in the future, and bond prices witnessed an overall downward trend during the month, pushing US 10-year yields up to a high of 4.89%. Strong economic growth in Europe and Asia also precipitated a similar trend in respective regional bond prices.

In the energy markets, easing conditions on both the demand (rising inventories) and supply (tensions in Nigeria) fronts meant that crude oil, natural gas and gasoline all finished the month lower. Metals prices traded lower as well, owing to more stable demand and supply conditions and to a strengthening dollar.

In the currency markets, the dollar strengthened on the back of better-than-expected economic data and a continued emphasis on inflation from the Fed. Furthermore, the resulting higher US interest rate expectations - coupled with a hawkish European Central Bank, and a Bank of Japan that decided to keep rates unchanged at 0.5% - spelled a widening interest rate differential, and the dollar strengthened against both currencies, while the euro reached record highs against the Japanese yen.

Global equities powered forward for a third consecutive month as themes that kick-started the rally continued to hold sway (improving economic growth, earnings growth, pause in rate hikes), and the markets ignored negative news (such as continued weakness in US home sales data). M&A volume drove prices in both the equity and fixed income markets. Amid such clear up-trends, equity long/short (1.8%), event driven (2.1%), macro (1.5%) and multi-strategy (2%) funds were the obvious beneficiaries.

May returns from regional fund of funds allocations were solid across the board.

The month’s best returns came from funds allocating to the emerging markets (2.6%) and to Asia Pacific (2.4%), with the markets proving particularly resilient to negative data.

To reiterate, market movements during the month were, for the most part, a continuation of those in April; strong corporate earnings data, ebbing inflation concerns and influx of liquidity, coupled with the concentration of emerging market opportunities, all explain hedge fund and fund of funds returns in the region.

A key risk in the current environment is that of a possible market correction, brought on by Fed tightening or merely by profit taking.

Rajeev Baddepudi is hedge fund analyst with Eurekahedge in Singapore