Hedge funds hit hard in May

NEW YORK (CNNMoney.com) - Hedge funds took it on the chin during the recent market correction at the end of May, owing to sharp declines in metal prices and declines in the broader stock markets, according to analysts.

After two consecutive weeks of strength in the beginning of May hedge funds fell sharply in the third week. The Merrill Lynch Diversified Hedge Fund Index ultimately posted a 0.94 percent loss, according to an analyst note from Merrill Lynch. The hardest-hit strategies were equity long/short funds, global macro and managed futures funds.

Hedge funds are private, lightly regulated investment pools for wealthy individuals or institutional investors. The funds use a wide variety of strategies, from betting on or against stocks, currencies or commodities to more esoteric strategies involving "derivative" investments or turning around distressed companies. But they generally won't welcome individuals as investors unless they have a net worth of at least $1 million.

Managed futures funds, which trade commodity futures contracts, fell the hardest last week, declining 3.22 percent in the week ending May 22, according to Merrill Lynch's hedge fund index, owing in part to a sharp drop in precious metals prices following a sell off. Managed futures funds lost 2.12 percent for the first three weeks of May.

U.S. equity long/short funds, which hold long positions in stocks and hedge those positions by shorting stocks, ETFs or related instruments, fell 2.68 percent during the same week, thanks to a broad market sell off. The strategy fell 3.54 percent during the first three weeks of May.

But the Merrill Lynch analysts also blame new Federal Reserve Chairman Ben Bernanke - not because of his policies, but because the first year for any new Fed chairman means higher volatility and lower equity returns for the S&P 500, according to the analysts.

Global macro funds, which invest in currencies and other instruments in foreign markets, fell 2.76 during the week ending May 22 and are down 2.7 percent for the first three weeks of the month. All but two of the hedge fund strategies Merrill Lynch tracks were in negative territory for the first three weeks of May.

These early summer doldrums fall on the heels of a strong first quarter for hedge funds, which posted their best first quarter in three years at the start of 2006 and pulled in $24 billion in new assets as wealthy investors sought alternatives to the stock and bond markets, new research shows.

The first-quarter flows bring the total amount of assets invested in hedge funds worldwide up to about $1.2 trillion, according to Chicago-based hedge fund tracker Hedge Fund Research.