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"After a strong start in the first two months of 2012, hedge funds lost steam in March and presented a mixed picture," said Terry Tian, alternative investments analyst with Morningstar. "While many U.S. equity strategies delivered positive returns, emerging markets, managed futures, and currency strategies suffered losses."

The U.S. stock market continued to rally in March—the S&P 500 Index and the Russell 2000 Index rose 3.3% and 2.6% for the month, respectively, finishing the first quarter up 12.6% and 12.4%, respectively. The Morningstar MSCI North America Hedge Fund Index, which includes hedge funds investing primarily in U.S. stocks, rose only 0.5% in March and 5.5% for the first quarter. Hedge funds that invested in smaller-capitalization stocks, however, outperformed. The Morningstar MSCI Small & Mid Cap Hedge Fund Index advanced 1.1% in March, finishing the first quarter up 10.8%.

Emerging-markets oriented hedge funds struggled in March due to weaker-than-expected economic data from China. The MSCI China NR Index dropped 6.9% and the MSCI Emerging Markets NR Index fell 3.3% in March. The Morningstar MSCI Emerging Markets Hedge Fund Index declined 0.9% for the month.

March proved to be another difficult month for managed futures strategies, as the lack of trends in most markets (such as crude oil and soft commodities) and reversals in some others (precious metals and currencies, for example) contributed to losses. The Morningstar MSCI Systematic Trading Hedge Fund Index declined 1.9% in March, ending the first quarter down 0.4%.

Currency strategies experienced significant losses in March—the Morningstar MSCI Currencies Hedge Fund Index plummeted 4.9%, making it the worst-performing Morningstar MSCI Hedge Fund Index for the month. Commodity currencies, such as the Australian Dollar, Norwegian Krone, and Canadian Dollar, responded to the renewed concerns over China's growth and fell sharply in March, reversing their upward trends since the beginning of the year.

In February, single-manager hedge funds saw outflows of $708 million, while funds of hedge funds gathered $49 million after eight consecutive months of outflows. The U.S. long/short equity category experienced the heaviest redemptions among all single-manager categories, bleeding $1.2 billion. The diversified arbitrage and long/short debt categories received inflows of $482 million and $348 million, respectively.

The Morningstar release can be read here.

Press release

BC