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“May was a strong month for risky assets,” A.J. D’Asaro, fund analyst at Morningstar, said. “Emerging markets advanced rapidly, led by Asia, and the S&P 500 closed the month at an all-time high of 1,924.”

The emerging markets rebound, which was already underway in March and April, accelerated in May, benefiting emerging market hedge funds. In late 2013 and early 2014, a strengthening U.S. dollar and increased perception of political risk caused broad losses in the same funds. The Morningstar MSCI Emerging Markets Hedge Fund Index rose 2.3% in May, which brought its year-to-date increase to 3.0%. In contrast, the unhedged MSCI Emerging Markets Index advanced 3.5% in May, for a year-to-date increase of 3.4%, finally retrenching its staggering loss of 6.5% in January. Hedge funds were able to mitigate volatility in the beginning of the year, falling only 1.9% in January. However, the MSCI Emerging Markets Index has outperformed the hedge fund index over time. The Morningstar MSCI Emerging Markets Hedge Fund Index and the MSCI Emerging Markets Index have risen 0.5% and 4.3%, respectively, for the 12 months ended May 2014.

European hedge funds advanced in May as market participants speculated on European Central Bank quantitative easing. The Morningstar MSCI Europe Hedge Fund Index rose 2.0% in May, and is up 5.2% for the year to date through May. The Morningstar MSCI North America Index increased on the same news, and rose 0.8% in May. The Morningstar MSCI Europe Hedge Fund Index and the Morningstar MSCI North America Index have increased 10.0% and 11.2%, respectively, for the 12 months ended May 2014.

Managed futures hedge fund strategies faced headwinds in commodities, but were buoyed by a concurrent rally in global stocks and bonds. The Morningstar MSCI Directional Trading Hedge Fund Index, which includes both discretionary and systematic futures-based strategies, rose 0.9% in May, and the Morningstar MSCI Systematic Trading Hedge Fund Index rose 1.3%, while the Dow Jones UBS Commodity Index fell 2.9%. For the 12 months ended May 2014, the Morningstar MSCI Directional Trading Hedge Fund Index increased 0.9%, and the Morningstar MSCI Systematic Trading Hedge Fund Index declined 2.0% as hedge funds struggled with frequent reversals of investor sentiment near the end of 2013.

Morningstar

Press Release