The Average U.S. Hedge Fund gained 1.5% net in May while the Average Offshore Hedge Fund gained 1.2% net. In comparison, the NASDAQ dropped ?0.2% and the S&P 500 and Dow gained 0.7% and 1.9%, respectively. Hedge funds also continue to lead the major indices for the year to date through May, with the Average U.S. Hedge Fund up 2.9% net and the Average Offshore Hedge Fund up 3.4% net. The Dow has gained 1.9% through May, while the S&P 500 and NASDAQ remain negative for the year to date, with ?4.4% and ?14.5% returns, respectively.
For only the second time since December 1999, the S&P 500 was able to string two consecutive monthly gains together, giving investors hope that April?s market rally was, in fact, sustainable. On the whole, market gains were, however, modest, and almost 60% of hedge funds were able to outperform the S&P 500. Hedge funds also outperformed actively managed funds in May, as the Average Equity Mutual Fund gained only 0.3% net.
While the ongoing economic slump has proved troublesome for plenty of corporations, their misfortunes have created opportunities for investors who know how to invest in their securities. As a result, Distressed Securities managers posted the best returns of the fourteen strategies we track. Because the performance of these securities is much more a product of company-specific events than general market trends, these managers tend to have low correlations to the major indices and have been able to produce some impressive gains over the past five months. In fact, Distressed Securities funds are leading the investment strategies on a year-to-date basis.
Managers that employ a value strategy of investing are also performing well this year. These managers look for stocks that are undervalued to purchase, and sell short stocks they believe are overvalued. This strategy tends to favor smaller cap stocks, which have been performing better than their large cap and tech peers.
While recent economic data indicated that weakness seems likely to persist?a fact already discounted by the markets?it also hinted that the worst may be behind us. Furthermore, Fed Chairman Greenspan has indicated that he is willing to further cut rates if necessary and seems satisfied that inflation should not become a problem. However, it is likely that the tug of war between bulls and bears will continue through the summer months and that carefully selected hedged managers could offer the best chance of outperforming the indices and posting gains.
For May, the best performing strategies were U.S. Distressed Securities, U.S. Emerging Markets and Offshore Emerging Markets, which had net returns of 5.1%, 4.0% and 3.0%, respectively. For the year to date through May, U.S. Distressed Securities managers have posted the best net return of 10.7%. U.S. Value and U.S. Emerging Markets have returned 9.3% and 8.3%, respectively.