Hedge fund gains hit nine-year high

• Highest-performing hedge funds invested in Hungary and India
• Pension funds have continued to back hedge funds

Hedge funds enjoyed a bonanza in May with gains at a nine-year high, according to industry figures released today.

A strong rise in stock values in emerging markets combined with a resurgence in stockmarkets across all major western economies helped the Credit Suisse/Tremont Broad Hedge Fund Index return 4.06%, the largest monthly performance jump since February 2000.

Hedge funds that invested in Hungary and India were among the highest performing, along with those that picked Russia and Brazil. Funds tracking the financial sector and the oil market also made strong gains during the month.

The figures follow a report showing that pension funds have continued to back hedge funds despite calls for a retrenchment away from risky investments.

Advisers Watson Wyatt said the pension funds moved into a raft of alternative investments in the run-up to the current financial crisis, and were sticking with their plans.

It said: "The travails of the hedge fund industry during 2008 are well documented and parts of the industry are still fighting for survival. Notwithstanding, we believe in the ability of highly talented investors to adapt to a changing environment and generate good risk-adjusted returns for pension funds."

It added: "Change in this sector will continue as larger funds invest more assets directly and start to have greater influence on fees; the knock-on effect should be a better deal all-round for investors.

According to research by the firm, allocations to alternative assets have continued to rise and now account for 17% of all pension fund assets globally, up from 7% 10 years ago.

An analysis of the top 100 managers of alternative funds shows that pension funds remain mainly invested in property as an alternative to equities. Real estate managers account for around 58% of assets, followed by private equity fund of funds, fund of hedge funds, infrastructure and commodities.

Hedge fund values dropped sharply last year and the industry suffered from mass withdrawals by customers who needed to repatriate cash to prop up their other business interests. Thousands of firms went bust or closed to new business.

However, the last few months have proved a boon for the funds, with those invested in emerging markets' funds returning 6.96% on average.

Hungary's stockmarket soared by almost 27%, while India climbed 37.7%, Russia 28.5% and Brazil 22%.

The average performance for the 7,000 hedge funds tracked by Lipper and included in the survey was a positive 5.77%.