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Morningstar MSCI Composite Hedge Fund Index down -0.2% in June; (+7.2% YTD)

Monday, July 29, 2013
Opalesque Industry Update - Morningstar, Inc., a leading provider of independent investment research, today reported preliminary hedge fund performance for June 2013 as well as estimated asset flows through May. The Morningstar MSCI Composite Hedge Fund Index, an asset-weighted composite of nearly 1,000 hedge funds in the Morningstar Hedge Fund database, fell 2.0% in June, pushing down its year-to-date increase to 7.2%. Global stock and bond indexes also declined in June; the MSCI World NR global stock market and Barclays Global Aggregate TR bond indexes dropped 1.2% and 2.5%, respectively.

“The spike in volatility that hit global markets in June caught most hedge funds off guard,” AJ D’Asaro, fund analyst at Morningstar, said. “Nearly all hedge fund strategies declined for the month, but funds invested in emerging-markets and trend-following strategies fared the worst.”

Reports of economic weakness, slowing growth, and high inflation in developing countries triggered massive sell-offs. Hedge funds invested in commodity-driven economies, such as Brazil and Russia, fell even further amid continuing declines in commodity prices. The Morningstar MSCI Emerging Markets Hedge Fund Index shed 4.0% in June, reducing the year-to-date increase to a scant 1.9%. The Morningstar MSCI Emerging Markets Hedge Fund Index, however, declined much less than the unhedged MSCI Emerging Markets Stock Index, which dropped 6.4% in June and 9.6% for the first six months of the year.

Hedge funds concentrated in developed equity markets, including the U.S., Europe, and Japan, fared better. These markets partially recovered toward month end as the U.S. Federal Reserve implied that any slowdown in asset purchases would be contingent upon a more robust U.S. economic recovery and the European Central Bank also reaffirmed its loose monetary policy. The Morningstar MSCI North America Hedge Fund Index dropped just 0.5%, besting the S&P 500 Index, which fell 1.3% in June.

Systematic trading or momentum-based hedge fund strategies continued to struggle in June due to sharp reversals in the price trends of most major futures contract markets. The Morningstar MSCI Systematic Trading Hedge Fund Index sank 2.4%, extending its two-year decline. There was, however, a considerable divergence of returns among trend followers in June, as strategies tracking shorter-term price trends were able to adjust to the rapid price reversals and report modest gains for the month. Systematic trading was the only Morningstar hedge fund category to experience major net outflows of more than $1 billion in May and $5.7 billion over the trailing 12 months. In May 2013, single-manager hedge funds in Morningstar’s database saw net outflows of $360 million, but collected $2 billion in net inflows for the year through May.

Long-short debt hedge funds received $1.7 billion through May, the most net inflows of all single-manager hedge fund strategies. Unfortunately, debt-oriented hedge fund strategies posted moderate losses in June as interest rates spiked. The 10-year U.S. Treasury note yield reached 2.6%, up nearly 100 basis points from the month before. The Morningstar MSCI Long Short Credit Hedge Fund Index fell by 1.8% in June, reducing its growth for the first six months of the year to 1.2%. In contrast, the Barclays US Aggregate Bond Index sank only 1.6% in June and remained up 2.4% for the year to date.

Funds in the Morningstar MSCI Merger Arbitrage Hedge Fund Index buffered traditional stock and bond portfolios in June. The index dipped only 0.4%. An upsurge of merger and acquisition deals in the telecom sector helped hedge funds, but spreads widened because of financing fears. The Morningstar MSCI Merger Arbitrage Hedge Fund Index advanced 0.5% in the second quarter and 1.9% for the year to date. Of all the Morningstar MSCI Hedge Fund Indexes, only the Morningstar MSCI Small Cap Hedge Fund Index rose in June, ahead by 0.56% on the month and 8.7% for the year-to-date period.

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


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