The gains were led by the equity hedge and event driven strategies, which offset weakness in macro and commodity trading adviser (CTA) strategies, Chicago-based Hedge Fund Research reported.

The gains were led by a 1.8 per cent rise in the HFRI Equity Hedge Index. Equity hedge, the largest strategy area for the equally-weighted HFRI Composite, saw gains distributed across most sub-strategies, with the fundamental value, sector technology and fundamental growth sectors advancing by 2.5 per cent, 2.4 per cent, and 1.1 per cent, respectively.

Short bias funds – those which profit from market falls - detracted somewhat from the overall performance of equity hedge funds, dropping 3.2 per cent in May from April.

The fixed income-based relative value arbitrage strategy, the largest hedge fund strategy area by capital with $640 billion in assets, also posted its 12th consecutive monthly gain and the 46th gain in 53 months since the onset of the financial crisis in December 2008. The HFRI Relative Value Index rose 0.06 per cent in May.

“The performance gains seen in May are significant because in contrast to prior months, when risk-on sentiment and powerful equity market beta globally drove performance, May was dominated by a sharp reversal in the Nikkei, concerns about the impact of curtailment of quantitative easing by the US Federal Reserve and a sharp rise in bond yields globally,” said Kenneth Heinz, president of HFR.

“Risk-on sentiment quickly reversed to risk-off into month-end and while certain quantitative, trend-following strategies were adversely impacted by these reversals, strong positioning and effective hedging across equity, event and arbitrage drove gains across the HFRI indices, underscoring the powerful dynamic of strategic diversification inherent in investible indices and across heterogeneous fund strategies.”

Heinz added: “While the extent and continuation of equity market gains may be unclear at this point, the eventual curtailment and extraction of stimulus measures is likely to contribute to a challenging, volatile and uncertain environment, and hedge funds are tactically and strategically positioned to generate performance and preserve gains through just these sorts of conditions.”