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Morningstar MSCI Composite Hedge Fund Index Down 2.7% in 2011, Second Worst Annual Performance Since 1994

Thursday, January 19, 2012
Opalesque Industry Update - Morningstar, Inc., a leading provider of independent investment research, today reported preliminary hedge fund performance for December and for the year ending Dec. 31, 2011, as well as estimated asset flows through November.

The Morningstar MSCI Composite Hedge Fund Index, an asset-weighted composite of nearly 1,000 hedge funds in the Morningstar Hedge Fund database, rose 0.4% in December, but ended the year down 2.7%, the second worst annual performance since the index's inception in 1994.

"Hedge funds sorely disappointed investors in 2011," said Terry Tian, alternative investments analyst with Morningstar. "Macro-economic headwinds, rising stock correlations, and choppy commodity markets all contributed to the lackluster performance of hedge funds last year, particularly those focused on stockpicking, international, and managed-futures strategies."

Stock-picking strategies across geographical regions struggled to deliver as correlations between individual stocks (as measured by the CBOE S&P 500 Implied Correlation Index) climbed in the second half of 2011.

The Morningstar MSCI Security Selection Hedge Fund Index dropped 0.6% in December, ending the year down 8.3%, while the MSCI World NR tock index declined only 5.5%.

Amid the Eurozone sovereign debt crisis and a general slowdown in emerging market economies, stockpicking hedge funds concentrating in those regions performed poorly on an absolute basis in 2011. The Morningstar MSCI Europe Hedge Fund Index managed to eke out a 0.2% rise in December, but dropped 5.9% for the year, while the Morningstar MSCI Emerging Markets Hedge Fund Index declined 1.1% in December and 11.8% for the year. On a relative basis, these numbers are more encouraging—the MSCI Europe and MSCI Emerging Markets stock indexes dove 11.1% and 18.4%, respectively. U.S. equity hedge funds, on the other hand, managed to lose money in 2011 even as the S&P 500 Index rallied in the fourth quarter. The Morningstar MSCI North America Hedge Fund Index finished the year with a 3.1% decline, while the S&P 500 rose 2.1%.

The absence of clear upward or downward price trends in many major futures markets in 2011 (crude oil, for example) as well as sudden price reversals in others (such as gold futures in September 2011) took its toll on systematic trading strategies, which bet on long-term momentum of futures contracts across different asset classes. The Morningstar MSCI Systematic Trading Hedge Fund Index rose 0.3% in December, but posted a 4.8% decline in 2011, its worst annual performance since its 1994 inception.

Arbitrage strategies were some of the few to deliver this year. The Morningstar MSCI Fixed Income Arbitrage Hedge Fund Index, which tracks funds that profit from pricing inefficiencies in both public and private debt, rose 1.5% in December, elevating its 2011 performance to 6.2%. Merger arbitrage strategies benefited from an increase in deal volumes, as companies with abundant cash and improving balance sheets sought M&A opportunities. The Morningstar MSCI Merger Arbitrage Hedge Fund Index rose 0.5% in December and 4.2% for the year.

In November, single-strategy hedge funds in the Morningstar database saw overall outflows of $1.6 billion, while funds of hedge funds lost $235 million in assets. Global macro hedge funds experienced the heaviest redemptions of all categories, leaking $1.6 billion in assets. Debt arbitrage and U.S. long/short Equity experienced modest inflows, bringing in $320 million and $204 million, respectively. December returns for the Morningstar MSCI Hedge Fund Indexes and November asset flows are based on funds that reported as of January 11, 2012. Hedge fund investors, managers, consultants, and advisors can access additional information through Morningstar Direct SM , the company’s global research platform for institutions.

Morningstar has approximately 11,000 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.

(press release and performance table)

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individuals, financial advisors, and institutions. Morningstar provides data on approximately 330,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 5 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its registered investment advisor subsidiaries and has more than $167 billion in assets under advisement and management as of Sept. 30, 2011. The company has operations in 26 countries.


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