Hedge funds lost 1.3% in May, according to the Credit Suisse/Tremont Hedge Fund Index.

Emerging markets funds were the weak spot, dropping more than 5% for the month. Conversely, short-bias funds feasted, gaining 5.4%.

“The Credit Suisse/Tremont Hedge Fund Indices performed relatively well with four out of the 10 strategies posting positive returns as broad sector diversification tempered the negative performance of the emerging and equity markets for the month of May,” said Oliver Schupp, president of the Credit Suisse/Tremont Hedge Fund Index.

“After weathering the worst month in almost two years, fears of inflation, continued interest rate increases, and a large drop in consumer confidence, characterized the market climate,” Schupp noted. “As a result, Long/Short Equity managers with large net and gross exposures were caught by the first sign of market uncertainty in two years, and those with low net exposures avoided the bulk of the sell off and produced flat to positive returns from stock specific positions resulting in an aggregate negative performance for the sector of 2.84%.”

“With signs that the Federal Reserve would raise interest rates to contain inflation, emerging markets suffered as investors shunned riskier investments resulting in the worst decline of emerging market assets since 1998 and a negative performance for Emerging Market managers of 5.02%,” said Robert Schulman, chief executive officer of Tremont Capital Management Inc.

“Increased market volatility and trading volumes acted as a boom to short-term statistical arbitrage programs as investors fled hazardous assets in search of traditional value and large cap, higher rated companies, contributing to the positive performance of Equity Market Neutral managers with 0.82% for the month,” he added.