The CTA / Quant Macro hedge fund category was the best performing strategy in May but hedge funds as a whole continue to lag the stock market, according to the May Hedge Fund Monthly Update from UBS.

Hedge funds vs Stock market

Emerging Markets hedge funds lagged behind in second place

The CTA/Quant Macro category, traders who often utilize derivatives and algorithms to deploy capital in markets, were up 2.4 percent in May, the largest advance of any hedge fund category survived. Emerging Markets hedge funds lagged behind in second place at 1.8 percent monthly return. The average for the entire hedge fund strategy group for the month was 1.4 percent versus 2.0 percent for the MSCI World Index.

Emerging market headge funds

CTAs remained long fixed income, the report noted, and the shift lower in rates, which caught many fundamental observers by surprise, generated significant returns for CTAs. Year to date, however, the CTA / Quant category is near the breakeven line.

Global Investor Interest by Hedge Fund Strategy

For macro hedge funds, UBS had made commentary previously about the decline in rates as being frustrating to global macro hedge funds. “There has been some mixed US economic data, but overall it has been relatively strong and the Fed continues to taper its asset purchases,” the report said. “Short US fixed income is among the largest consensus trades amongst macro hedge funds as they bet on higher US interest rates – but this trade failed to work (again)….”

Hedge funds flow in May

Entering May, UBS reports its trade desk saw an increase in demand for US curve steepeners, as clients faded the recent outperformance of the long end. These turned out to be losing trades, and short covering in these positions as well as covering of outright shorts undoubtedly added to the move lower in rates. The UBS rates desk continues to see a lot of client interest in bearish trades, although a lot of shorts were taken off the last week of May.

Hedge funds May US Fund Flows

On the year, all hedge fund strategies are up 1.3 percent while the MSCI World Index is up 4.3 percent and the Dow Jones UBS Commodity Index is up 6.5 percent.

The mediocre returns come as the hedge fund industry has recently surpassed $3 trillion in assets under management, a new record. Barrons reports that year-to-date hedge fund inflows are $93.3 billion, the most significant start to a year since 2007, just before the 2008 crash.

Indian market attractive

Reviewing the markets, the UBS report remains bullish on India and its election results. “While markets can always take a breather as investors await actual reforms as well as real impact on economy, as seen in Japan/China, we think any such dips could prove to be a buying opportunity,” the report said. “Unlike the last 3 years, we expect earnings growth estimates of 15-16% to be met or potentially beaten and yet valuations remain reasonable near fair valuation. We believe investors will be willing to give a premium for growth.”

Hedge funds india

Net short JPY
Net short JPY

UBS tracks “consensus” trades established in January and notes that, for the most part, the consensus hasn’t fared too well.

Profitable consensus trades

Long the near end in Europe (rates lower for longer).

Long GBP on improving UK economic data.

Long select EM FX after taper related sell off created some pockets of opportunity.

Long US equities (continued economic recovery).

Unprofitable consensus trades

Short the near end in the US (rates may rise early in 2015/ late 2014).

Short longer dated bonds in developed markets; curve steepeners

Short JPY (long USDJPY) on reflation efforts.

Short AUD (China slowdown, commodity weakness).

Long CNH (short USDCNH) on policy liberalization.

Short EUR on expectation of continued easing.

Long MXN on positive structural reforms.

Long USD on economic recovery and expected higher

Long Japan equities (on aggressive reflation efforts).

Short emerging market equities, particularly those with budget deficits that may be hurt by Fed tapering (e.g. Brazil, India, Indonesia, Turkey).

Short gold as inflation continues to be subdued.