May was marked by a sharp fall in bond markets (the Govies World index fell by 3.4%) linked to an improvement in the macroeconomic news flow in the United States and increasing expectations surrounding a reduction in the Fed’s asset purchases. Against this backdrop of rising volatility in stock and bond markets, the hedge fund industry recorded a positive monthly performance for the seventh month in a row: +0.7% for the HFRI index and +0.4% for the DJ Credit Suisse index.  CTAs were among the worst performers in the month of May according to a new note from Natixis.

CTAs may performance

CTAs Performance in May

Directional strategies are found at the bottom of the ranking. The massive underperformance of CTAs (-5%, i.e. one of the 10 worst months recorded since 1999) suggests that the trend reversal in Japan, especially in the bond market, took these managers by surprise. Global Macro suffered as a result of their long exposure to US Treasuries and posted a very slightly negative performance (-0.05%).


Worst performers after CTAs

Distressed and Event Driven showed the best monthly performances with +2.4% and +2.3%, respectively. They were followed by Convertible Arbitrage (+1.3%). Despite the poor performance of High Yield and US Treasuries (-0.5% and -2%, respectively), High Yield and Fixed Income Arbitrage funds succeeded in curbing their losses (+0.1% and +0.01%, respectively).

The performances of long equity bias strategies in May were more scattered. While Long/Short funds (+1.2%) benefited from the good performance of developed stock markets excluding Japan (+2.1% and +1.4% for the S&P 500 and the Stoxx), Emerging funds (-0.2%) were negatively affected by the poor performance of stock markets and especially bond markets, and were down 3.8%.

Currently, the good performance of risky markets seems to be even more dependent on central bank actions, as reflected by the negative performances in early June. While a bearish trend has now taken hold in bond markets (confirmed by the latest FOMC meeting), directional strategies are also going to face problems. Against this backdrop, arbitrage strategies and volatility specialists should be favored in order to curb losses says Naxtis.