Backy Smith 
Hedge funds, particularly those trading stocks, delivered strong returns in May as rising equity markets, led by the U.S. technology sector, boosted performance across the industry, according to Reuters and prime brokerage data.
Stock-picking hedge funds returned 5.35% in May, outperforming the MSCI global equity index, which gained 4.55%, a note from Goldman Sachs seen by Reuters showed.
The positive results came as the S&P 500 extended its winning streak and investor enthusiasm around artificial intelligence infrastructure spending continued to fuel a powerful rally in U.S. stocks. Systematic stock-trading hedge funds returned a more modest 0.84% for the month.
Hedge funds increased their buying activity significantly, purchasing U.S. equities at the fastest pace in six months. Trading flows were driven by long buys and short covering, particularly in index and exchange-traded fund products. Short positions in U.S.-listed ETFs declined for a second consecutive week.
Financial stocks were among the clearest beneficiaries of the rotation, attracting the largest net buying in nearly six months. Long purchases in the sector outpaced short sales by a ratio of roughly 6.5 to 1, led by payment companies and banks.
Despite the recent inflows, overall hedge fund allocations to financials remain near five-year lows. In contrast, the industrials sector continued to face selling pressure, with short exposure reaching the 90th percentile on a one-year basis.
Leverage metrics reflected renewed risk appetite among funds. U.S. long/short net leverage rose to 55.3%, while the fundamental long/short ratio increased and now sits near the 99th percentile.
Major multi-strategy funds also posted solid gains. Citadel’s flagship Wellington fund and Millennium Management delivered positive returns for the month, contributing to what has been a strong start to the year for many large hedge funds.
The improved performance marks a shift from the more cautious stance many funds adopted in mid-May, when they took profits on chip stocks and added macro shorts amid rising bond yields and inflation concerns.
The buoyant equity markets, particularly the strength in technology shares, provided a favorable environment for equity-focused strategies. This comes amid broader optimism around AI-driven growth and resilient corporate earnings.
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