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Morningstar MSCI Composite Hedge Fund Index rose 1.1% in July 2013 (4% YTD)

Wednesday, August 28, 2013
Opalesque Industry Update - Morningstar, Inc., a leading provider of independent investment research, today reported preliminary hedge fund performance for July 2013 as well as estimated asset flows through June. The Morningstar MSCI Composite Hedge Fund Index, an asset-weighted composite of nearly 1,000 hedge funds in the Morningstar Hedge Fund database, rose 1.1% in July, mitigating half of last month’s decline and pushing its year-to-date increase to 4.0%. Global stock and bond indexes also increased; the MSCI World NR global stock market climbed 5.3% and the Barclays Global Aggregate TR bond index advanced 1.3%.

“Most hedge fund strategies notched gainsin July following June’s decline, but developed markets equity strategies were clear winners,” AJ D’Asaro, fund analyst at Morningstar, said.“The Morningstar MSCI Developed Markets Hedge Fund Index advanced 2.0% in July, extending its year-to-date increase to 6.4%as Europe and Japan showed signs of a turnaround and U. S. interest rates stabilized.”

The Morningstar MSCI North America Hedge Fund Index led world regions for the second straight monthwith a 2.5% increase. Small-cap hedge fund strategies performed particularly well—the Morningstar MSCI Small Cap Hedge Fund Index, which primarily represents small-cap equity strategies in the United States, climbed 3.3% in July and 12.0% for the year to date. It remains the top performer of all the Morningstar MSCI Hedge Fund Indexes with a 19.8% increase for the trailing 12 months. In comparison, the unhedged Russell 2000 Index surged 7.0% in July, 24.0% for the year to date, and 35.0% for the trailing 12 months.

A larger than expected increase in German manufacturing output and a decline in Portugese unemployment suggested that a Pan-European economic recovery may be imminent, boosting performance for Europe-focused hedge funds. The Morningstar MSCI Europe Index climbed 1.6% for the month and 5.7% for the year to date. In comparison, the unhedged MSCI Europe index rocketed 7.4% in July and 9.7%for the year to date. In contrast,slowing growth and high inflation in emerging markets continued to plague the Morningstar MSCI Emerging Markets Hedge Fund Index, which inched up only 0.7% in July and 2.7% for the year to date. The hedge fund index has performed well versus the passive MSCI Emerging Markets Index, however, which advanced 1.0% in July but plummeted 8.6% for the year to date.

Systematic trading, or momentum-based, hedge fund strategies also struggled as market volatility sent mixed signals to trading algorithms. The Morningstar MSCI Systematic Trading Hedge Fund Index sank 0.4%in July, extending its year-to-date decline to 1.8% and continuing itstwo-year losing streak.

Debt-oriented hedge fund strategies began to turn up as the 10-year U.S. Treasury note yield stabilized at 2.6%. The Morningstar MSCI Fixed Income Hedge Fund Index rose by 0.5% in July and 2.1% for the year to date. The Morningstar MSCI Fixed Income Arbitrage Hedge Fund Indexincreased 0.6% in July and 0.9% for the year to date. In contrast, the Barclays U.S. Aggregate Bond Index advanced by 1.3% in July and fell 3.6% for the year to date.

In June 2013, single-manager hedge funds in Morningstar’s database saw net outflows of $851 million, but collected $1.3 billion in net inflows for the year through June. No hedge fund category received significant inflows during the month, possibly due to investor fears incited by market volatility. Multistrategy hedge funds experienced the largest net outflows for the month of $1.4 billion, although net capital flows are still positive for the first half of the year at $417 million. Systematic trading strategies experienced net outflows of $267 million of in June and $3.6 billion for the first half of the year likely due to continued poor performance.

July returns for the Morningstar MSCI Hedge Fund Indexes are based on funds that reported as of August 21, 2013. June asset flows are based on funds that reported as of August 15, 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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