Morningstar, Inc., a provider of independent investment research, reported preliminary hedge fund performance for January 2011 as well as asset flows through 2010. Hedge funds enjoyed a slightly positive January, but trailed most stock-market indexes. The Morningstar 1000 Hedge Fund Index and the currency hedged Morningstar MSCI Hedge Fund Index rose 0.4% and 0.2%, respectively. Meanwhile, the S&P 500 and MSCI World Indexes were both up more than 2%. “Many hedge funds posted strong performance in January, but losses in global-macro and trend-following strategies overshadowed any overall gains in the industry,” said Nadia Papagiannis, alternative investment strategist for Morningstar.
Funds in Morningstar’s Global Trend Hedge Fund Index, which trade futures primarily according to momentum strategies, suffered losses in multiple asset classes, as contracts tied to equities, bonds, currencies, and commodities saw mid-month price reversals. The Global Trend Hedge Fund Index declined 1.0% in January. The Morningstar Global Non-trend Hedge Fund Index dropped ever further, 2.4% in January, as funds betting on gold and betting against the Euro or European stocks slipped.
European equities rallied most of the month. Greece and Portugal successfully issued new debt as European leaders showed stronger resolve to support the Euro currency union. Hedge funds focused on European stocks stayed significantly hedged, however, missing most of the rally. The Morningstar Europe Equity Hedge Fund Index rose a modest 1.0% against the MSCI Europe Index’s 3.9% climb.
U.S. stocks experienced the best January in several years, but losses in the second half of the month due to disappointing earnings and political turmoil in Egypt detracted from returns. The Morningstar U.S. Equity.
Hedge Fund Index increased 1.4% against the S&P 500 Index’s 2.4% rise. Smaller-capitalization and emerging-markets stocks reacted even more strongly to the bad news, after a significant run-up in late 2010 and early 2011. The Morningstar U.S. Small Cap Equity Hedge Fund Index rose just 0.8% in January, while the Morningstar Emerging Markets Equity Hedge Fund Index declined 0.1%.
Political risk and inflation fears battered emerging-market debt, but riskier corporate and convertible debt in developed markets outperformed. Hedge funds concentrating in these markets as well as those that short longer-term Treasuries, profited. The Morningstar Convertible Arbitrage and Debt Arbitrage Hedge Fund Indexes rose 1.6% and 1.4%, respectively.
Funds in Morningstar’s debt-arbitrage, global-debt, and global-trend categories had significant inflows in December 2010, although the database as a whole experienced net outflows of $628 million. For 2010, investors added $1.9 billion to hedge funds in Morningstar’s database. The bulk of those assets went to global non-trend funds, while funds in the distressed securities, multi-strategy, global debt, and global equity categories leaked the most assets.
Multi-strategy funds significantly outpaced hedge funds of funds in January. The Morningstar Multi-Strategy Hedge Fund Index rose 1.5% while the Morningstar Hedge Fund of Funds Index increased only 0.1%. Hedge funds of funds in Morningstar’s database saw $13.0 billion in outflows in 2010.
D.C.