Hedge Funds Hold Fairly Steady Amid The May Market Turmoil

Hedge funds continued to show their worth in May, with those administered by Citco recording only a small drop even as the broader markets continued to plummet. Hedge fund performance improved slightly month over month, although not enough to shift the asset class into the green on a year-to-date basis.

Hedge fund performance in May

According to Citco’s monthly report on hedge fund performance, the funds it administered recorded a total weighted average return of -1.1%, compared to the -2.9% return recorded in April . The firm said performance by strategy and size was again mixed.

Unsurprisingly, commodity hedge funds continued to post robust returns due to high commodity prices, recording an average return of 1.1% for May, although they were flat on a median basis. However, global macro funds outperformed commodity funds slightly, recording a weighted average return of 1.2% and a median return of 0.7%.

All other strategies were in the red for May, although they recorded smaller declines last month than in April. Interestingly, the worst-performing strategy was event-driven, with an average return of -1.2% and a median return of -0.7%.

Equities did slightly better on a weighted average return basis at -1.9%, although the dispersion within the strategy was wider. The median return came in at -1.2%, the worst median return of all the strategies.

Hedge fund performance by size

Citco reported that hedge funds with more than $3 billion in assets under administration continued to see the steepest declines in May. They recorded a weighted average return of -2% and a median return of -0.6%, indicating meaningful dispersion among funds. The only size that was in the green for May was the $1 billion to $3 billion category, which returned 0.3% on a weighted average basis and 0.2% on a median basis.

Dispersion in the $500 million to $1 billion category was meaningful, as those funds were flat on a median basis with a weighted average return of -0.8%. The smallest category, containing hedge funds with less than $200 million in assets under administration, recorded a weighted average return of -0.8% and a median return of -0.4%.

Citco noted that the gap between the weighted average return of -1.1% and the median return of -0.4% confirmed the trend of underperformance by larger hedge funds . However, the firm added that overall performance picked up in May, with 42.4% of the funds administered by Citco generating positive returns, compared to only 38.9% in April.

Fund flows

Investors recorded hedge funds with net inflows in May, more than tripling their allocations month over month. Investors poured $9.3 billion into hedge funds throughout the month, significantly offsetting the $6.6 billion in redemptions to result in $2.7 billion in net inflows. In April, hedge funds recorded only $800 million in net inflows.

Funds with more than $10 billion in assets captured the lion’s share of the inflows at $2.1 billion in net capital. The only size category to record outflows was $5 billion to $10 billion, but net outflows were small.

Multi-strategy hedge funds saw the largest amount of net inflows at $1.5 billion, while private equity and real estate strategies recorded $600 million and $400 million in net flows, respectively. On the other hand, emerging markets and event-driven hedge funds recorded small outflows of about $100 million each.

Geographically, the Americas and Europe recorded most of the inflows at $1.3 billion and $1 billion in net inflows, respectively.

Citco expects these trends to reverse in June. Based on its recent conversations, the firm estimates overall redemptions of $15.1 billion for June, with another $8.6 billion in redemptions projected for the rest of the year. It’s unclear how much of these outflows will be offset by new subscriptions for June, which marks the end of the second quarter.

Extreme volatility is driving increased trade volumes

Last month brought the second-highest average trade volumes year to date, with an increase of 6.2% from April. Trade volumes were up 14.3% compared to May 2021.

The firm pointed to a strong correlation between market volatility and trade volumes. Average volatility in May was the highest recorded year to date as the VIX stood at 29.25. Last month’s volatility even surpassed the volatility observed in March.

That’s when much of the turmoil in Europe started following Russia’s invasion of Ukraine toward the end of February. In March, the VIX averaged 26.9 despite the outbreak of the conflict. In April, the VIX dropped back down to 24.2.

The most recent jump in volatility suggests that May’s increase in trade volumes was likely due to a mix of volatility-driven trades and new buying opportunities. The firm added that options on rates and indices were the only asset class that traded up in May compared to April.

Rising market volatility and trade volumes kept Treasury volumes elevated last month. Increased over-the-counter settlements have arrived on the back of increased trading. Margin moves also spiked. The firm also cited the recent market uncertainty for an increase in cash management being deployed to decrease unencumbered cash balances across primes and custodians.

Michelle Jones contributed to this report.