May was a good month for hedge funds across the board, particularly those in Asia (ex-Japan, one of the exceptions), notes Eurekahedge in its latest monthly hedge fund performance commentary (register to read, subscription not necessary).
The reasons, according to Eurekahedge, include soaring underlying equity markets, which in turn benefited from abundant liquidity, stronger-than-expected US economic data, a robust earnings season, and an extremely active M&A landscape.
Overall, the Eurekahedge Hedge Fund Index clocked a return of 2.4 per cent, the best hedge fund monthly performance since January 2006.
Region-wise, North American managers shook off the subprime mortgage turmoil to post healthy gains of 2.1 per cent. But the month’s best returns came from funds allocating to the emerging markets (4.4%), notably in Asia ex-Japan (4.9%), with the underlying markets proving particularly resilient to negative data.
Interestingly, hedge fund returns in Japan ended the month up an anaemic 0.9%, dampened by the fact that the best equity market performers were concentrated among the large-cap names while the smaller indices were down, notes the report.
Performance among European strategies, on the other hand, was more varied – reflected in the relatively subdued returns of the Eurekahedge European Hedge Fund Index (1.3%). This may be due to, among other things, some volatility in European equities early in the month and weakness against the dollar (as the markets braced themselves for a more extended tightening cycle from the European Central Bank), says the report.
Not surprisingly, the best-performing strategies for the month were equity long/short (up 2.9% on average) and event-driven funds (up 2.4%), given the abundance of profitable plays in both the primary and secondary markets, the report says.
However, a note of caution: while the strong economic growth and rising confidence in markets such as China, India, Korea, Germany, France and Italy, can explain the growth (current as well as expected) to an extent, asset valuations do seem stretched, says Rajeev Baddepudi of Eurekhedge.
“A key risk in the current environment is that of a possible market correction, brought on by Fed tightening or merely by profit-taking. Furthermore, such a correction could be exacerbated by an unwinding of carry trades, as seen in February.
“The ifs and whens of this are anybody’s guess, the structural soundness of the underlying economies notwithstanding. Fund managers are, nevertheless, pricing this risk into their near-term outlook.”