Total hedge fund assets rose 5.8% during May with 1.0% attributable to investor net inflows and 4.8% attributable to returns, according to data on hedgefund.net published by Standard & Poor's Fund Services.

"Based on returns achieved by fund of hedge funds (FoHFs) rated by S&P Fund Services, we estimate that returns in the second quarter have been around 5%, with 6% achieved over the year to date," said lead analyst Randal Goldsmith. Across the underlying hedge fund strategies, each individual strategy delivered a positive return in May apart from short biased, said Goldsmith.

Distressed strategies had their best month for over 18 years, returning 6.1%. Emerging market hedge fund performance was the strongest strategy in May (up 10.2%) which was among the five best months on record.

FoHFs were slow to catch the turn in March after reducing net and gross exposures to historically low levels. Although gross exposures remain low, net exposures within long-short equity hedge allocations are moving up significantly, said the company.

During the past 12 months, the vast majority of FoHF rating actions have been negative. S&P fund ratings have been taken away from over 10% of FoHFs for poor liquidity management (the company does not rate a fund that has over 20% of the portfolio in a side-pocket or where dealings are suspended) or weaknesses in their risk management processes related to exposure to Madoff strategies.