Morningstar: Hedge Funds Post Small Gains

Morningstar, Inc., a provider of independent investment research, reports a summary of hedge fund performance for the first quarter of 2009 and flows through February. Hedge funds took modest advantage of March's upswings in the global equity and credit markets.

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Morningstar, Inc., a provider of independent investment research, reports a summary of hedge fund performance for the first quarter of 2009 and flows through February.

Hedge funds took modest advantage of March’s upswings in the global equity and credit markets. Preliminary results show the Morningstar 1000 Hedge Fund Index rose 2.1% in March, while the currency-hedged Morningstar MSCI Asset-Weighted Hedge Fund Composite Index increased 0.1%. Year to date these indexes ended almost flat. The Morningstar 1000 Hedge Fund Index dropped 0.1% for the quarter while the Morningstar MSCI Asset-Weighted Hedge Fund Composite Index rose 0.5%.

Equity markets around the world significantly rebounded in March as appetite for risk returned, especially in emerging markets. Positive lending and manufacturing news in China coupled with higher commodity prices, which helped stocks in other emerging economies such as Russia, drove the Morningstar MSCI Emerging Markets and Morningstar Emerging Markets Hedge Fund Indexes to increase 4.2% and 6.2%, respectively.

Convertible bonds rallied in March, as the extremely wide spreads caused by a forced sell off late last year made these bonds cheap for investors to purchase. The Morningstar Convertible Arbitrage Hedge Fund Index rose 3.9% in March and 7.0% over the quarter, making it the best-performing hedge fund category index. Convertible arbitrage and short equity hedge funds in Morningstar’s database were the only categories to receive inflows in March–these funds saw inflows of USD45 million and USD42 million, respectively. In aggregate, hedge funds in the database, excluding hedge funds of funds, experienced net outflows of USD4.2 billion in February and USD31.1 billion year to date.

The Morningstar Corporate Actions Hedge Fund Index, which includes funds that attempt to profit from mergers and acquisitions, IPOs, spin-offs, and capital restructuring, increased 2.2% in March and 3.4% for the quarter. Mergers and acquisitions in the first quarter fell to levels not seen since 2004, according to Dealogic, but deals from bankruptcies jumped in March, especially in the United States and Japan. Deal volume from private-equity leveraged buyouts hit its lowest point since 1996. Global IPOs also fell by almost half in the first quarter compared to the first quarter of 2008.

Global trend-following hedge funds, which profit from sustained upward or downward price trends in financial and commodity futures, saw a difficult month, as many contracts–most notably oil and gold–whipsawed during March. The Morningstar Global Trends Hedge Fund Index dropped 2.0% in March and 4.1% over the quarter. On the bright side, fund managers in the Morningstar Global Non-Trend Index who tactically bet on fundamental macro-economic moves in the market benefited from a rally in government bonds and stocks after the Federal Reserve and Bank of England implemented quantitative easing. This index rose 0.5% in March, but declined 0.1% over the quarter.

March returns and February asset flows for the Morningstar Hedge Fund Indexes are based on funds that reported as of 14 April 2009. Returns for the Morningstar MSCI Hedge Fund Indexes are based on funds that reported March performance as of 15 April 2009.

Morningstar is also now calculating hedge fund indexes by applying the MSCI Hedge Fund Index Methodology and Hedge Fund Classification Standard to Morningstar’s hedge fund database.

“In March we saw a recovery in equity and some credit markets, which helped hedge funds post small gains,” says Nadia Papagiannis, hedge fund analyst, Morningstar.

“But many hedge fund managers, believing that the economy is not yet out of hot water, continued to remain cautious, and were not strongly positioned to participate in the market rally. The Morningstar MSCI Developed Markets Hedge Fund Index rose only 1.1% in March compared to the MSCI World Index, which climbed 7.2%.”

L.D.

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