Hedge Fund Indices Turned Red in May

The emerging-market crisis and the turmoil in global stock markets are spilling over into hedge funds, as evidenced by the poor hedge fund-performance numbers for May that were released today.

The Credit Suisse(CSR Quote - Cramer on CSR - Stock Picks)/Tremont Hedge Fund Index, which mimics the returns of 421 funds, is a negative 1.30% in May, the first time this year that the index has posted a negative monthly return. For the year, though, performance remains positive at 6.40%.

The Barclay Group, a Fairfield, Iowa-based hedge fund index provider, estimates that more than 70% of hedge funds lost money last month. It reports that the average loss was 3.09%. Overall, the Barclay Hedge Fund Index that tracks the performance of more than 4,700 hedge funds posted a negative 1.78% return last month.

The riskier strategies that often give hedge funds an investment edge appear to have weighed heavily on their returns. "With signs that the Federal Reserve would raise interest rates to contain inflation, emerging markets suffered as investors shunned riskier investments resulting in the worst decline of emerging-market assets since 1998," says Robert Schulman, chief executive of Tremont Capital Management, a Rye, N.Y.-based hedge fund-asset management firm.

Not surprisingly, the hedge fund strategy that performed the worst last month was emerging markets, which posted a negative performance of 5.02%, according to the Credit Suisse/Tremont Index. The second poorest strategy was long/short equity (-2.84%), as many hedge fund managers have significant positions in emerging markets, as well as long exposure to equities.

"Long/short equity managers with large net and gross exposure were caught by the first sign of market uncertainty in two years," said Oliver Schupp, president of the Credit Suisse/Tremont Hedge Fund Index.

Since May 10, stocks have plummeted worldwide from the fear of further tightening policies by central banks and inflation worries. In the U.S., the fear of the Federal Reserve being tough on inflation has led to a sharp decline in stock prices over the past month and a half. The S&P 500 was down 1.46% as of yesterday's close. Things started to improve Wednesday though, with stocks rallying for two consecutive days. Today, the S&P 500 rose 24 points, or 2%, to 1254. But nobody knows if the rally will be long-lived at this juncture.