Morningstar, Inc., a provider of independent investment research, reported preliminary hedge fund performance for the third quarter of 2009 and asset flows through August 2009. Hedge funds are recovering rapidly in 2009. The Morningstar 1000 Hedge Fund Index climbed 7.4% during the third quarter and 17.2% through the first nine months of the year, while the currency-hedged Morningstar MSCI Hedge Fund Composite rose 6.1% for the quarter and 12.1% for the year through September.
Paced by an exceptionally strong September, hedge funds began to regain their swagger in the third quarter, says Nadia Papagiannis, Morningstar alternative investments strategist. The road to recovery for hedge funds was paved by strong performance in riskier asset classes such as emerging markets, distressed, and small-cap securities.
But hedge funds overall haven`t yet returned to their October 2007 peaksthe Morningstar 1000 Hedge Fund Index declined 25.2% through February 2009, and has only recovered 20% in the last seven months, with 11.4% to go. Certain hedge fund strategies have set new highs, however. In September, the Morningstar Global Non-Trend Hedge Fund Index, which includes hedge funds following global macro-economic strategies, fully recovered from 2008 losses, despite lagging the performance of other category indexes this year. Appreciation of the Australian dollar and the Euro versus the U.S. Dollar as well as spikes in silver and gold prices helped this index rise 1.9% in September.
Convertible arbitrage and emerging markets hedge funds have outperformed all other Morningstar categories thus far in 2009. The Morningstar Convertible Arbitrage Hedge Fund Index rose 3.0% in September and 32.1% for the year through September, while the currency-hedged Morningstar MSCI Emerging Markets Hedge Fund Index increased 4.6% in September and 31.0% for the year through September. Convertible bonds, which crashed in 2008 due to forced selling by leveraged hedge funds, are enjoying a tremendous 2009. Low prices and higher yields attracted traditional, non-hedge-fund investors, while more companies issued convertible bonds during tight bank lending conditions and rapidly rising equity prices. Emerging markets hedge funds benefited from outsized rallies in Indian, Russian, and Latin American stocks in 2009.
Strong equity markets in developed countries buoyed funds in the Morningstar Global Equity Hedge Fund Index, which increased 3.7% in Septemberslightly less than the MSCI World Equity Index, which rose 4.0%. The Morningstar MSCI Developed Markets Hedge Fund Index rose only 2.5%, however, as allocations to Japanese stocks dragged down performance. The Morningstar MSCI Japan Hedge Fund Index and the Morningstar Short Equity Hedge Fund Index were the worst-performing Morningstar hedge fund indexes in September dropping 1.2% and 1.6%, respectively.
September saw a continuation of the rally in small-capitalization stocks, as investors snapped up riskier assets. The Morningstar U.S. Small Cap Equity Hedge Fund Index rose 5.0% and the Morningstar Distressed Hedge Fund Index, which also reflects risk appetite, jumped 6.7%.
As risk-aversion declined, hedge funds once again experienced inflows. Funds in Morningstar`s database saw $5.9 billion of new flows in August, with the bulk of those assets going to global trend hedge funds. With the exceptions of August and June, investors have withdrawn assets from hedge funds every other month this year. Outflows totaled $59.7 billion for the year through August.
September returns and August asset flows for the Morningstar Hedge Fund Indexes are based on funds that reported as of Oct. 16, 2009. Returns for the Morningstar MSCI Hedge Fund Indexes are based on funds that reported August performance as of Oct. 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.
Please, visit www.altvest.com for more information.
D.C.