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Whereas nine-out-of-ten hedge fund strategies in the Index were positive in April, nine-out-often strategies were negative in May as volatility almost tripled from April lows (as measured by the CBOE VIX volatility index). Market volatility was driven by a number of factors and events that unfolded throughout the month, the most dominant of which was the sovereign risk situation affecting peripheral European economies.

The Index’s performance of -2.76% represents the first month of negative performance since February 2009, and the worst monthly performance since November 2008 when the index fell 4.15% in the wake of the Lehman bankruptcy. Nonetheless, hedge funds’ ability to position defensively allowed them to outperform equity market indices such as the S&P 500 Total Return Index (-7.99%) and the MSCI World Index (-9.77%) by margins of more than 5% and 7%, respectively. The widespread risky-asset sell-off led to rising correlations between and within asset classes which negatively impacted many managers across different strategies.

Here is a short summary of major events that impacted markets in May:

• May 2, European governments agreed on a €110 billion bailout for Greece (US $134 billion);

• May 6, a flash crash occurred in US stock markets and the Dow Jones Industrial Average dropped 1000 points in 20 minutes before bouncing back;

• May 10, the European Union announced a €750 billion bailout plan (almost US $1 trillion);

• May 18, Germany unilaterally implemented a ban on shorting of ten financial stocks and Eurozone bonds, causing a market drop;

• May 20, North Korea threatened an “all-out war” in response to South Korea’s claim that they torpedoed a South Korean warship, and the VIX Volatility Index reached a 10-month intra-day high of 45 following its two-year low of 15.5 in mid-April (see Figure 1, left-hand axis);

• May 28, Fitch Ratings downgraded Spain’s AAA sovereign credit rating, negatively affecting the euro. As a result of “flight-to-safety” moves by investors buying US Treasuries, the US dollar strengthened versus the euro to levels last seen on October 27, 2008, when it was at $1.24 (see right-hand axis in Figure 1). Additionally, the oil spill in the Gulf of Mexico, regulatory reform in the US, and tensions in the Middle East contributed to investor uncertainty.

Full report: Source

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