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Morningstar MSCI Composite Hedge Fund Index up 1.5% in December (+6.0% 2012)

Monday, January 28, 2013
Opalesque Industry Update: Morningstar, Inc., a leading provider of independent investment research, today reported preliminary hedge fund performance for December 2012 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 1.2% in December and advanced 6.0% for the year. Nearly all Morningstar MSCI hedge fund indexes ended 2012 in positive territory.

“Unhampered by fiscal cliff uncertainty, international equity markets soared in December,” Mallory Horejs, alternative investments analyst at Morningstar, said. “Nearly all hedge fund strategies posted gains for the month, but equity funds investing outside the United States led the way. For the year 2012, hedge fund strategies investing in riskier asset classes, including international equities, small cap equities, and distressed securities, delivered the best performance.”

Credit-oriented hedge fund strategies were clear winners in 2012 as investors chased rising yields and high-yield bond and leverage loan issuance reached record highs. The Morningstar MSCI Distressed Securities Hedge Fund Index soared 13.1% during the year, outpacing most other hedge fund strategies tracked by Morningstar. The Morningstar MSCI Long-Short Credit and Fixed Income Arbitrage Hedge Fund Indexes also delivered big numbers this year, rising 10.4% and 9.4%, respectively. These hedge fund strategies trailed the unhedged credit market indexes though, as the Barclays Global High Yield Index sprinted ahead 19.6% in 2012.

December concluded a good year for equity-oriented hedge fund strategies in general, particularly those focused on Europe and emerging market stocks. The Morningstar MSCI Emerging Markets Hedge Fund Index jumped 4.0% in December, more than any other Morningstar hedge fund index, on the back of improving Chinese macroeconomic data. The index was up 14.1% in 2012 but lagged the broad MSCI Emerging Market Stock Index’s 18.2% rise. Asian hedge funds also fared well after Japan’s newly elected Prime Minister announced plans for significant government spending and monetary easing. The Morningstar MSCI Asia Pacific Hedge Fund Index climbed 3.5% for the month of December and 8.4% for the year 2012. Both figures fell short of the MSCI AC Asia stock index, however, which rose 15.8% in 2012.

Small-cap equity strategies rallied as well, with the Morningstar MSCI Small Cap Hedge Fund Index and Russell 2000 Index advancing 3.3% and 3.6%, respectively, in December. These riskier equity strategies also posted some of the largest increases for the year, with the Morningstar MSCI Small Cap and Morningstar MSCI Small & Mid Cap Hedge Fund Indexes spiking 10.1% and 14.4%, respectively, in 2012.

The Morningstar MSCI North America Hedge Fund Index, which primarily includes long-short equity hedge funds, ended the year up 8.1%, trailing the S&P 500 by a very wide margin. However, North American stock-oriented hedge funds managed to beat the S&P 500 in December following the last-minute resolution of the fiscal cliff negotiations and improved employment and housing market indicators. The Morningstar MSCI North America Hedge Fund Index increased 1.3% for the month, narrowly outpacing the S&P 500 Index’s 0.9% rise. Short-sellers struggled in the face of this strong performance; the Morningstar MSCI Short Bias Hedge Fund Index declined 3.1% in December and 14.4% for the year 2012.

Frequent equity, commodity and interest rate market reversals throughout 2012 hindered trend-following hedge funds for the second year in a row. The Morningstar MSCI Systematic Trading Hedge Fund Index sank 3.5% for the year, making it one of the few strategies to conclude 2012 in the red. However, these strategies did manage to eke out a 0.7% increase in December, due largely to profitable currency trades such as shorting the Japanese Yen versus U.S. and Australian dollars. Commodity contracts across the energy, agricultural, and metal sectors suffered price declines in the second half of December and the DJ UBS Commodity Index fell 2.6% in December.

n November 2012, single-manager funds in Morningstar’s Hedge Fund Database saw outflows of $598 million, marking the third consecutive month of outflows. Year-to-date through November, investors have pulled $3.3 billion from hedge funds in the Morningstar database. This contrasts sharply with investor behavior seen during 2011 and 2010, when funds in the hedge fund database received inflows of $17.9 and $10.1 billion, respectively.

Hedge funds in the systematic futures category, which trade futures contracts according to trend-following and momentum-based strategies, received the largest redemptions in November 2012, leaking $412 million collectively. Equity-oriented strategies also suffered, as funds in the emerging markets long/short equity, equity market neutral, and global long/short equity categories leaked $195, $105, and $100 million, respectively. Multistrategy hedge funds netted more assets than any other category in November, posting inflows of $200 million for the month.

December returns for the Morningstar MSCI Hedge Fund Indexes are based on funds that reported as of January 21, 2013 and November asset flows are based on funds that reported as of January 17, 2013. Hedge fund investors, managers, consultants, and advisors can access additional information through Morningstar Direct SM, the company’s global research platform for institutions.


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