Morningstar, Inc., a provider of independent investment research, today reported preliminary hedge fund performance for October 2009 and asset flows through September. Hedge fund returns were flat October, protecting against declines in the global equity markets. The Morningstar 1000 Hedge Fund Index squeezed out a gain of 0.1%, and the currency-hedged Morningstar MSCI Composite hedge fund index (asset weighted) declined a slightly by 0.3%. Meanwhile, the S&P 500 and MSCI World stock indexes fell 1.9% and 1.8%, respectively. Late October saw a reversal in the risk-taking exuberance that had characterized the preceding seven months. Amid economic uncertainty, prices of risky assets declined while volatility spiked.
The Morningstar Debt Arbitrage and Distressed Securities Hedge Fund Indexes saw the largest increases of 1.9% each in October. Hedge funds following arbitrage strategies and buying distressed securities have enjoyed a tremendous year, as they continue to profit from assets acquired at fire-sale prices in late 2008. Profits are starting to narrow, however, as the discounts on assets are diminishing. Although these categories posted the largest increases among the Morningstar hedge fund categories in October, the returns were much lower than in previous months this year.
The Morningstar Emerging Market Equity Hedge Fund Index gained 1.8% in October while the MSCI Emerging Markets NR Equity Index ended almost flat at 0.1%. Because certain emerging market countries, such as China and Russia, posted significant gains, performance of emerging market hedge funds depended on country allocation. In developed markets, European and Asian equity markets declined less than the U.S. equity market, but this did not carry over to hedge funds. The Morningstar Developed Asia Hedge Fund Index dropped 0.6%, slightly more than its European (-0.3%) and U.S. (-0.5%) counterparts, as the funds in the index were generally less hedged against the market.
The price-trend driven Morningstar Global Trend Hedge Fund Index fell 1.4%, while the more fundamentally driven Global Non Trend Hedge Fund Index rose 0.3% in October. Funds in both of these categories make macro-economic bets in equities, fixed-income, currencies, and commodities.
These funds benefited from the appreciation of gold, which reached record highs in October, moves in the Australian dollar versus the U.S. dollar, and price trends in global government bonds. Price-trend-following funds were hit by a reversal in the trends in equity and currency markets in late October, though, resulting in overall losses.
Even though investors have been incrementally re-allocating money into hedge fund investments, funds in Morningstar’s database saw net outflows of $196 million in September, largely driven by redemptions in one particular multi-strategy hedge fund. Funds in the Morningstar Europe Equity hedge fund category had the largest inflows of $847 million. Net outflows for the year-to-date through September were $63.3 billion.
October returns and September asset flows for the Morningstar Hedge Fund Indexes are based on funds that reported as of Nov. 16, 2009. Returns for the Morningstar MSCI Hedge Fund Indexes are based on funds that reported October performance as of Nov. 12, 2009. Hedge fund investors, managers, consultants, and advisors can access additional information through Morningstar AltvestSM, the companys the research platform designed specifically for hedge funds.
Morningstar has more than 8,000 hedge funds and funds of hedge funds in its database. The Morningstar 1000 Hedge Fund Index, a global, broadly representative benchmark for hedge fund performance, has return history from January 2003. The index comprises the top 90% of eligible assets in Morningstars hedge fund database. For the purposes of the index, Morningstar counts funds with shared portfolios as a single hedge fund; funds of hedge funds are excluded from consideration. The index is updated daily for the previous month-end, rebalanced monthly, and reconstituted semi-annually. In addition, Morningstar has 17 category indexes and four broad category indexes based on Morningstars strategy-specific classification system for hedge funds. Morningstars hedge fund indexes are not investable.
In addition to calculating the Morningstar Hedge Fund Indexes, Morningstar also calculates hedge fund indexes by applying the MSCI Hedge Fund Index Methodology and Hedge Fund Classification Standard to Morningstars hedge fund database. These indexes demonstrate the performance of hedge funds to investors who have hedged their currency exposure back into U.S. dollars. The MSCI Hedge Fund Index Methodology classifies hedge funds by investment process, geography, and asset class.
D.C.