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The Morningstar MSCI Composite Hedge Fund Index, an asset-weighted composite of nearly 1,000 hedge funds in the Morningstar hedge fund database, rose 0.5% in February and 2.5% in the first two months of the year. Over the trailing 12 months, the index rose 5.4%.

“Most hedge fund managers we track took advantage of the modest rally that continued for risky assets in February,” Philip Guziec, alternative investing strategist at Morningstar, said. “However, trend-following strategies continued to struggle as global markets moved in fits and starts.”

The top three performing hedge fund strategies in February were small/mid cap, European, and emerging market equities. The Morningstar MSCI Small & Mid Cap Hedge Fund Index rose 2.6%, driven largely by one healthcare oriented long/short equity fund. European markets reacted to rising concern over a worsening fiscal crisis after recent Italian elections left the future of austerity measures unclear. Compounding concern was a February 28 announcement from the International Monetary Fund that U.S. government spending cuts could lower global growth. The MSCI Europe Index fell 2.8% in February on the U.S. and European market news, but hedge funds operating in the space, as measured by the Morningstar MSCI Europe Hedge Fund Index, were able to generate a 2.2% increase. Emerging markets also reacted to the gloomy economic news in U.S. and European as well as to gross domestic product growth data that came in below expectations for India and Brazil. While the MSCI Emerging Markets Index declined 1.3%, hedge fund managers took advantage of the dark mood. The Morningstar MSCI Emerging Market Hedge Fund Index rose 1.1%.

Other notable hedge fund indexes with strong performance in February were the Morningstar MSCI Distressed Securities Hedge Fund Index and the Morningstar MSCI Equity Hedge Fund Index, which rose 1.0% and 0.8%, respectively. However, both hedge funds indexes trailed the S&P 500 and Morningstar All-Cap Deep Value Indexes, which rose 1.4% and 1.2%, respectively.p> The worst-performing strategies for February were global macro and trend-following. The challenging conditions of rapid trend reversals that have prevailed for over two years continued in February. The Morningstar MSCI Systematic Trading Hedge Fund Index, which represents trend-following strategies, posted a 1.6% decline, while the Morningstar MSCI Directional Trading Hedge Fund Index, which also includes global-macro strategies, fell 1.2% for the month.

In January 2013, single-manager funds in Morningstar’s hedge fund database had inflows of $3.3 billion, marking the first month of inflows after four months of outflows. Hedge funds in the Multi strategy category had the largest inflows in January, adding $1.8 billion. Global macro hedge funds also saw inflows, gaining $873 million in assets. The biggest outflows occurred in the Long-Only Other and Global Long/Short Equity categories, leaking $738 million and $142 million, respectively, during the month. Over the trailing 12 months, investors have pulled $1.1 billion from hedge funds tracked by Morningstar.

February returns for the Morningstar MSCI Hedge Fund Indexes and January asset flows are based on funds that reported data to Morningstar as of March 18, 2013. Hedge fund investors, managers, consultants, and advisors can access additional information through Morningstar Direct SM, the company’s global research platform for institutions.

Press release, including tables.

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