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Morningstar MSCI Composite Hedge Fund Index inched up 0.5% in August (4.1% YTD)

Friday, September 28, 2012
Opalesque Industry Update —Morningstar, Inc., a leading provider of independent investment research, today reported preliminary hedge fund performance for August 2012 as well as asset flows through July.

The Morningstar MSCI Composite Hedge Fund Index, an asset-weighted composite of nearly 1,000 hedge funds in the Morningstar Hedge Fund database, inched up 0.5% in August, falling short of the MSCI World Stock Index's 2.5% climb.

"Speculation of further central bank easing in the United States and Europe drove most global equity markets higher in August," said Mallory Horejs, an alternative investments analyst with Morningstar. "Managers across most hedge fund strategies found opportunities to profit."

Despite light trading volume throughout August, developed-markets equities notably benefited from improving U.S. economic data and the European Central Bank's bond-buying proposal. Hedge funds investing in North America and Europe rose but failed to keep pace with the unhedged stock markets. The Morningstar MSCI North America Hedge Fund Index climbed 1.5% but fell short of the S&P 500 Index's 2.3% increase. The Morningstar MSCI Europe Hedge Fund Index trailed the MSCI Europe stock market index by a wider margin, as the indexes rose 0.5% and 4.4%, respectively. Overall investor sentiment continued to improve throughout the month, and the Chicago Board of Options Exchange Volatility Index fell to levels not seen since 2007.

In August, event-driven hedge fund strategies posted their highest monthly increases in nearly six months because of increasing investor risk tolerance and lower equity volatility levels. The Morningstar MSCI Event-Driven and Morningstar MSCI Merger Arbitrage Hedge Fund indexes jumped 1.1% and 0.4%, respectively. High-yield securities also rallied sharply in August, and investor demand boosted new high-yield bond issuance to unseasonably high levels. The Morningstar MSCI Distressed Securities Hedge Fund Index rose 1.4% against the Barclays Global High Yield Index's 2.1% jump. The Morningstar MSCI Specialist Credit Hedge Fund Index climbed 0.9%.

Asia Pacific and emerging-markets equities did not fare as well in August, as Japan's second-quarter gross domestic product was revised downward and growth prospects in China continued to decline. The MSCI Asia Pacific and MSCI Emerging Market stock market indexes dipped 0.6% and 0.3%, respectively. Hedge funds investing in these regions managed to provide investors some downside protection, though. The Morningstar MSCI Asia Pacific and Morningstar MSCI Emerging Markets Hedge Fund indexes posted modest increases of 0.4% and 0.9%, respectively.

Price trend-following strategies were one of the few groups to post losses in August. Currency trading proved especially challenging as several currency pairs’ price trends reversed during the month. The Japanese yen, for example, first depreciated against the U.S. dollar because of lower export numbers in Japan, but then appreciated on news of Federal Reserve easing. The Morningstar MSCI Systematic Trading Hedge Fund Index, which includes funds that trade price momentum across equity, interest-rate, currency, or commodity futures contracts, declined 1.2%.

After leaking more than $2.5 billion in June, hedge funds in Morningstar's database experienced yet another month of sizable outflows, bleeding $4.2 billion in July. For the year to date through July, single-manager hedge funds in Morningstar’s database lost more than $5.1 billion. Systematic futures funds experienced the greatest outflows by far, losing $3.8 billion in July alone. Investors timed these withdrawals well, though, given the category's overall poor performance in August. Funds in the event-driven and distressed-securities categories also suffered, leaking $415 million and $346 million, respectively.

August returns for the Morningstar MSCI Hedge Fund Indexes are based on funds that reported as of September 27, 2012. July asset flows are based on funds that reported as of September 17, 2012. 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 and full performance table: corporate.morningstar.com/us/documents/pr/August-2012-Hedge-Fund-Press-Release.pdf

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