This year has been a difficult one for many reasons, and hedge funds are keenly aware. Most funds saw negative double-digit returns in March. Although April and May marked a significant turnaround for the markets, most hedge funds are still in the red for the year even after those two months helped them claw back a bit more in performance.

Management at one hedge fund, Prentice Capital Management, wrote in their first-quarter letter to investors that they believe March and April should be discussed together. Unlike many other hedge funds, Prentice was in the green for the first four months of the year, returning 6.6%. 

For comparison, the S&P 500 was down 9.3% for January through April, while the Russell 2000 was down 21.1% for the same period. To illustrate what a difficult time most hedge funds had during the first four months of the year, the HFRX Equity Hedge Index, an index that tracks the performance of hedge funds, was down 9.4%. 

Prentice Capital liquidated its investments in consumer discretionary names during the first quarter, a common theme among hedge funds last quarter. However the fund also went a step further and initiated short positions in several restaurant stocks, including Cheesecake Factory Inc (NASDAQ:CAKE), Bloomin' Brands Inc (NASDAQ:BLMN), Texas Roadhouse Inc (NASDAQ:TXRH), Dine Brands Global Inc (NYSE:DIN) and Brinker International, Inc (NYSE:EAT). 

Not every hedge fund is bearish on consumer discretionary names, however. Solitude Capital Management took the pullback as an opportunity to buy the dip in the sector, with an emphasis on consumer discretionary names assisted by technology. One key difference between SCM and other funds though is the fact that they invest only in Asia. 

April And May Brought Improvements

Most hedge funds were in the green for May, as the Eurekahedge Hedge Fund Index gained 2.03% for the month on the back of strong performance in U.S. equities. The index also demonstrates that April was another solid month for hedge funds. 

The index recorded performance-based gains of $43.2 billion for April. However, despite the strength in April and May, Eurekahedge shows that many hedge funds are in the red this year. For the first five months of the year, the index recorded a performance-based decline of $125.7 billion. 

Hedge fund managers generally agree that volatility is here to stay in the coming months. For example, Aristides Capital's Christopher Brown said in his May letter to investors that factor volatility was extreme in May. The Russell 2000 Value index was down 18.61% for the first two weeks of the month, while the Nasdaq was in the green for the same period. 

Opposing Views On Tech

Brown is especially bearish on tech stocks right now. He said that even before the pandemic hit, it felt like tech stocks were repeating the runup to the March 2000 blowoff, and he believes it still feels that way. He noted that the ratio of the software sector to the S&P 500 is at all-time highs, and day trader participation is the second-highest ever after the first quarter of 2000.

On the other hand, Alkeon Capital is well-known for its view of tech stocks as defensive names despite their extreme valuations. Because of its preference for tech stocks, the fund was up an impressive 8.11% for May, putting it in the green for the first five months at a time when most other funds are still in the red. 

By Michelle Jones

Michelle Jones was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Michelle has been with ValueWalk since 2012 and is now our editor-in-chief. Email her at [email protected].