Encouraging news today from RAB Special Situations after the listed fund (a feeder into the main hedge fund) reported a 10.5 percent NAV rise in May.

While this is behind the index return, it nevertheless marks a welcome boost for a fund that has reflected many of the hedge fund industry’s recent problems.

Many of the fund’s investments in small-caps and private companies became much harder to sell last summer as markets seized up, meaning the hedge fund wasn’t able to meet investor demands for their cash back or pay down debt owed to the prime broker.

Meanwhile, having done so well out of years of booming commodity prices, the fund was badly hit in the subsequent downturn, losing money on small-cap miners and a bad bet on Northern Rock among other things. Last year the feeder fund’s NAV dropped 73 percent and its share price lost 85 percent.

The hedge fund solved its immediate problems last year after investors agreed to lock up their cash for three years in return for lower fees.

Meanwhile, fund manager Philip Richards has been busy pruning back the portfolio’s position in unlisted companies from more than 70 percent at the start of the year to just under 50 percent in order to improve liquidity.

RAB must be hoping that performance will have picked up significantly by October 2011, when the lock-up ends, although how many investors will stay with the fund remains to be seen.

In the meantime, as is the case for many investors sitting on heavy losses, patience is called for.

“All indications are that the mood is turning, but the manager expects it will be a slow process,” the feeder fund told investors this morning. “As such we appreciate your continued patience, but feel that the wheels are in motion to reward this patience in the long-run.”