15/06/2010 Author: Shannon Hawthorne

Hedge fund sector up YTD despite May crisis

The global hedge fund industry has benefitted from positive inflows so far this year despite widespread poor performance in May, as institutional investors begin to allocate back into the absolute return space.

According the Fitch Ratings’ latest Hedge Funds Quarterly Report, the sector has continued to show resilience in the face of difficult market conditions, although the May crisis, which affected strategies across the board, did highlight many funds’ exposure to systemic risk.

"A period of price normalisation and dispersion based on fundamental factors and arbitrage usually follows a general and positive asset revaluation cycle," says Olivier Fines, an associate director in Fitch's EMEA Fund and Asset Manager Rating group.

However, he added that “Europe's sovereign crisis has affected liquidity and confidence, negatively impacting most strategies, as May returns have shown".

Between December 2009 and April 2010, the hedge fund sector produced returns of 4.6%, allowing many single manager funds to recoup their 2008 losses and go some way to matching previous high watermarks, as well as cushioning them from the impact of the May crisis, at least to some extent.

However, this was not true of funds of hedge funds (FoHFS), which continued to trail behind single managers in terms of performance. This, according to Fitch, is because FoHFs suffer from “a lack of flexibility given legacy conditions, fund restructuring and caution regarding liquidity”.