09/06/2010 Author: Gwyn Roberts

Editor's view: 10 June 2010

May has been one of those months navigated by luck, rather than judgement. Losses were across the board, with every strategy impacted by Europe’s government bond crisis, and the ensuing uncertainty unleashed in the global markets.  

Macro funds –  like Brevan Howard – should have made hay while the sun shone, by speculating on the robustness of the Euro. Unfortunately, any gains were wiped out by backfiring discretionary macro strategies and an unwillingness to become entangled in trades that could earn the ire of regulatory-minded politicians.

At the moment, political sanctions are held as a greater peril than performance woes or investor anger. One waggish fund of hedge funds manager – who coincidentally is down for the month – told HFMWeek that it was “counterintuitively” good that so many funds have lost money in May, because at least it “would mitigate the vampire hedge fund image.”  

With bad tidings coming from the US – despite the edge being taken off by Bernanke’s mollifying comments this week – and a large question mark still hanging over government debt, June looks set to be a very challenging month for the sector on a number of levels, as volatility flaps around, ebbing money from funds.

So far this has had a number of impacts. A bout of poor performance has surrendered YTD gains at the majority of managers. Hedge funds are also busily de-risking, as they reshuffle portfolios. Finally, anecdotal evidence suggests that prime brokers are also pulling in their horns. Cutting financing, while ramping-up lending fees as they insulate themselves against challenging times. In fact, one manager suggests that May, with an average hike of 30bps, has seen the steepest rise in PB funding costs for some time.

With managers now facing the possibility that 2010 may be about preserving, rather than making, money, hedge funds are increasingly reliant on retaining investor confidence. So far, we’ve seen few panic redemptions, but to avoid this further down the line, real trading skills will be required in June.