Investor: An insider's guide to the market: Although markets have recently recovered some of their poise after the declines in May, it is still too early to conclude definitively whether last month's market fall was a healthy correction or whether it marked the end of the current equity bull market.

May's market downdraught has impacted on the performances of all types of funds that are exposed to market risk, from pension funds to hedge funds. Recently released data from Rubicon for the performance of Irish pension funds in May showed that the average Irish managed pension fund lost 4.2 per cent of its value during the month.

Essentially, most of the gains achieved in the first four months of the year were eroded in May, leaving a year-to-date return of just 0.9 per cent. The average annual return over the last three years is still strong at 14.6 per cent, reflecting the strong performance of equity markets since March 2003. However, the average annual return over the last five years still bears the scars of the difficult years of 2001 and 2002, with the average fund achieving a return of only 2.8 per cent per annum.

With the average Irish pension fund still heavily committed to equities, pension trustees will be hoping that the upward trend in share prices resumes.

At the other end of the spectrum, many hedge funds suffered sharp losses during May. There is huge diversity amongst hedge fund investment strategies, so it is difficult to get reliable overall industry data. However, many of those funds pursuing long/short equity strategies suffered during May.

The traditional institutional managed or equity funds are "long-only" funds, ie they are always exposed to the overall market.

Hedge funds, on the other hand, embrace strategies that involve "shorting" the market.

By using derivative contracts such as futures and options, hedge funds can sell shares and market indices to profit from falling prices. During the equity bear market from 2000 to 2003, many hedge funds made a killing through the pursuit of such strategies.

In theory at least, hedge funds should have been able to benefit from falling share prices in May. In practice this did not prove to be so because many hedge fund managers were caught off-guard by the sudden onset of market volatility.

Also, many hedge funds would have been aggressively trading in emerging market securities and commodities, two sectors that were particularly hard hit in May.

Increased volatility is often seen as a portent of an inflection point in the market. There are many measures of volatility, some of which are mathematically sophisticated and difficult to understand. An intuitively simple and appealing indicator of volatility is the upswing in "event days".

In academic papers on market volatility, some researchers have defined an "event day" in the market as a day that has witnessed a close greater than 2 per cent in either direction.

In the UK, the FTSE100 witnessed four such days in May. This came after a long spell of two years where there were none.

Interestingly, since the beginning of the decade there have been only three months in which the FTSE100 notched up four or more event days. The highest number was seven in March 2003 which, of course, was the month that marked the end of the last bear market and the beginning of the current bull market.

The next biggest event day month was February 2000, which had six such days and this proved to be close to what proved to be the peak of the late 1990's equity bull market, which finally ended in April, 2000.

It is clear that the number of event days that occurred during May is sufficiently high to raise questions about the possibility of a market turning point.

Only time will tell whether the current bout of heightened market volatility is a precursor to a weak period of market returns.

One prediction that we can be more confident about is the likelihood that market volatility will stay above the norms of the past two years for several months. Upsurges in volatility tend to generate aftershocks so that it would be no surprise if financial markets trade erratically over the summer months.

In Investor's view, this could ultimately prove to be positive as it would act to force the unwinding of some of the more frothy and speculative positions that have been built up in the financial markets over the past three years.