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Morningstar 1000 Hedge Fund Index declined 4% in May, asset outflows continued in April standing at $2.4bn YTD

Tuesday, June 29, 2010
Opalesque Industry Updates - Morningstar, Inc., a provider of independent investment research, reported preliminary hedge fund performance for May 2010 and asset flows through April. The Morningstar 1000 Hedge Fund Index declined 4.0% in May, dragging year-to-date performance through May into negative territory with a decline of 1.8%. The currency-hedged Morningstar MSCI Composite Index declined 2.4% in May, but was still up 1.1% year to date through May.

“Hedge funds got wet but not soaked,” said John Rekenthaler, Morningstar’s vice president of research. “Whereas most major stock indexes dropped 8% to 12% during May, the typical hedge fund suffered only moderate losses. However, few hedge funds were fully protected against what turned out to be a global decline in asset prices. Only a single category of hedge funds, Distressed Securities, recorded a profit in May.”

Following Distressed Securities, which continued a barn-storming performance as the category’s year-to-date gains through May climbed to 10%, were the Global Non Trend, Short Equity, Global Debt, and Debt Arbitrage hedge fund category indexes. Each of those categories fell modestly, recording losses of less than 2%. The only other category index to drop less than 3% during May was the Equity Arbitrage group; the Debt and Equity Arbitrage categories are intended to be relatively resistant to the direction of market movements. The Short Equity category also experienced a loss, while it should have profited handsomely from May’s market misfortunes.

On the flip side, hedge funds that tend to have net long exposure to stocks suffered the worst declines. All Morningstar hedge-fund equity categories suffered declines of 4% to 7%. U.S. Equity performed best with a loss of 4.3% and Europe Equity fared the worst with a loss of 6.9%. The Morningstar MSCI hedge fund indexes, being hedged into the rallying U.S. dollar, fared better, as the drop in global stock prices was partially offset by the rise in the dollar. Most Morningstar MSCI hedge fund indexes of equity categories fell from 2% to 3% for the month. The Morningstar MSCI Japan and Morningstar MSCI Emerging Market equity hedge fund indexes fell more than 3%, because these funds are exposed to the Japanese Yen and emerging market currencies rather than the Euro, and did not benefit to the same extent from currency hedging.

May’s losses pushed most hedge fund indexes into the red for the year, in particular those with equity exposures. Europe Equity hedge funds were at the bottom, down 8.3% through May. Short Equity has fallen as well, declining 5.8% year to date. Bucking the trend among stock-related hedge funds were funds within the Corporate Actions category, with year-to-date gains of 4.5%; these funds follow strategies that are intended to be somewhat independent of the direction of the markets. U.S. Equity and U.S. Small Cap Equity Hedge Fund indexes remained barely in the black, with returns of 1.0% and 0.1%, respectively.

Among diversified hedge funds, Multi-Strategy funds beat Hedge Fund of Funds, with the former losing 3.4% for May and the latter falling 5.0%. For the year to date, the Multi-Strategy category is slightly ahead of the single-strategy Morningstar 1000 HF Index, with a loss of 1.5%, while the Hedge Fund of Funds Index is far behind, with a negative 4.7% return. This continues a several-year pattern of Multi-Strategy funds outperforming Hedge Fund of Funds, often by large margins.

Single-strategy hedge funds in the Morningstar database saw overall outflows of approximately $1.7 billion in April, bringing outflows to approximately $2.4 billion through April. Global Non-Trend funds and Corporate Actions funds have seen the largest inflows through April at $2.3 billion and $1.4 billion, respectively.

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