Morningstar, Inc., a provider of independent investment research, reported preliminary hedge fund performance for the second quarter of 2009 and asset flows through May. For the quarter, the Morningstar 1000 Hedge Fund Index posted its largest quarterly increase, 9.25%.
Previously, the indexs best result since its inception on Jan. 1, 2003, was a second-quarter 2003 rise of 7.40%. During the second quarter of 2009, the currency-hedged Morningstar MSCI Asset Weighted Hedge Fund Composite Index rose 5.12%, and the Morningstar MSCI Equal Weighted Hedge Fund Composite Index rose 8.77%. The substantially stronger increase of the equal-weighted hedge fund index indicates the lower-risk posture adopted by many of the industrys biggest funds, which held them back during the quarters rally.
Leading the way were hedge funds that were most geared to the booming equity markets, the Morningstar Emerging Markets Hedge Fund Index and the Morningstar U.S. Small Company Equity Hedge Fund Index, rose 24.93% and 19.72%, respectively. These gains were achieved almost exclusively in the first two months of the quarter, as the two categories inched out only small advances during the choppy month of June. Similarly, the currency-hedged Morningstar MSCI Emerging Market Index increased 1.90% in June and 18.76% for the quarter. In fact, June overall was a subdued time period, with nine of Morningstars 18 hedge fund indexes rising or falling less than 1% for the month.
Other hedge fund indexes that were exposed to equities also fared well. The Morningstar Developed Asia Equity Hedge Fund Index rose 13.33%, and the Morningstar U.S. Equity Hedge Fund Index rose 12.72%. The laggard among net long equity indexes, the Morningstar MSCI Europe Hedge Fund Index, still managed to rise a healthy 4.97% in the quarter, although these results might be considered disappointing given that the MSCI Europe Stock Index soared by 22.96% in U.S. dollars. This discrepancy occurred largely because the MSCI Europe Stock Index enjoyed currency gains resulting from the appreciation of the U.S. dollar against the Euro, while the funds in the hedge fund index were mostly denominated in local currencies.
Following on the heels of the equity hedge fund indexes were those funds exposed to less-liquid or lower-quality debt markets. Such markets frequently trade in tandem with equities, rising when economic optimism abounds, and declining on economic fears. For much of the second quarter, these debt markets were on the rebound. The Morningstar Corporate Actions Hedge Fund Index jumped 12.55%; the Morningstar Global Debt Hedge Fund Index rose 10.53% (aided by the slump in the U.S. dollar); the Morningstar Convertible Arbitrage Hedge Fund Index grew by 10.00%; the Morningstar Distressed Securities Hedge Fund Index was up 8.68%; the Morningstar Debt Arbitrage Hedge Fund Index appreciated by 8.52%; and finally the Morningstar MSCI Specialist Credit Index gained 7.45%. Once again, these indexes primarily achieved their successes during April and May, with only the Distressed Securities Index gaining more than 3% in June.
At the bottom of the totem pole for single-strategy hedge funds were those funds designed to have limited responsiveness to either the stock or bond markets. The Morningstar MSCI Relative Value Hedge Fund Index grew by 6.36% and the Morningstar Equity Arbitrage Hedge Fund Index rose 4.07%, good results for indexes that are designed to hedge away most systematic equity exposure. The Morningstar Global Non Trend Hedge Fund Index grew by 3.43%. Its counterpart, the Global Trend Hedge Fund Index, was buffeted by a decidedly choppy climate for commodities pricing, and lost 0.53%. Finally, the Morningstar Short Equity Index had a surprising gain in the quarter. Given the steepness of the markets advance, its gain of 2.00% should be a welcome surprise for short equity investors.
The quarter was not only the largest absolute gain for the Morningstar Hedge Fund Index 1000, but it also represented that single-strategy indexs greatest quarterly victory over the Morningstar Hedge Fund of Funds Index. At 6.22%, the Hedge Fund of Funds Index lagged the MHFI 1000 by more than 300 basis points, as hedge funds of funds suffered from having adopted very conservative positions during the rocky first quarter of 2009. In contrast, the Morningstar Multi-Strategy Hedge Fund Index just about kept pace with the MFHI 1000, picking up 9.09%.
D.C.