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Morningstar MSCI Composite EW Hedge Fund Index +1.6% for October; (+7.2% YTD)

Monday, November 25, 2013
Opalesque Industry Update - Morningstar, Inc., a leading provider of independent investment research, today reported preliminary hedge fund performance for October 2013 as well as estimated asset flows through September. The Morningstar MSCI Composite EW Hedge Fund Index, an equal-weighted composite of nearly 1,000 hedge funds in the Morningstar Hedge Fund database, rose 1.6% in October, along with global stock and bond markets. The MSCI World NR global stock index climbed 3.9%, and the Barclays Global Aggregate TR bond index rose 1.0% in October. The Morningstar MSCI Composite EW Hedge Fund Index has increased 7.2% for the year through October.

“Global stock and bond markets pulled back in the beginning of the16-day U.S. government shutdown in October,” AJ D’Asaro, fund analyst at Morningstar, said. “Hedge funds as a whole managed to see through the short term volatility, and every Morningstar MSCI Hedge Fund Index increased during the month.”

U.S. equity based hedge fund strategies profited the most as the perceived risk of a U.S. government shutdown and Federal Reserve tapering evaporated. The Morningstar MSCI North America Hedge Fund Index increased 1.6% for the month as the S&P 500 reached new all-time highs. Similarly, the Morningstar MSCI Small Cap Hedge Fund Index, which represents small-cap long-short equity strategies, rose 2.2% in October, while the Russell 2000 Index climbed 2.5%. The Morningstar MSCI North America Hedge Fund Index and the Morningstar MSCI Small Cap Hedge Fund Index have risen 10.6% and 17.4%, respectively, year-to-date through October while the S&P 500 and Russell 2000 Indexes increased 25.3% and 30.9%, respectively.

European equity-focused hedge funds also rallied strongly as earnings across the continent came in higher than expected, and inflation was lower than expected. The Morningstar MSCI Europe Hedge Fund Index advanced 2.2% in October and 9.6% for the year to date, compared with 4.3% and 21%, respectively, for the unhedged MSCI Europe NR stock index.

Bonds also benefited from lower-than-expected inflation in the Eurozone, as well as Janet Yellen’s nomination to lead the Federal Reserve. The Barclays Global Aggregate Bond Index and the Morningstar MSCI Fixed Income Hedge Fund Index both rose 1.0% in October. The Morningstar MSCI Fixed Income Hedge Fund Index advanced 4.0% for the year through October, while the unhedged Barclays Global Aggregate Bond Index declined by 1.2%, as hedge funds hedged their duration risk during the rising rate environment from May through September. Even managed futures hedge fund strategies were buoyed by the markets upward climb. The Morningstar MSCI Systematic Trading Hedge Fund Index gained 1.3% in October, although it has fallen 2.7% for the year to date.

Unrelated to the broad markets, arbitrage strategies did well in October. The Morningstar MSCI Arbitrage Hedge Fund Index rose 1.2%, and 3.6% for the year to date. Merger arbitrage strategies saw a pickup in healthcare and financial sector deals, driven by low interest rates and rising cash balances.

In aggregate, single-strategy hedge funds experienced net outflows of $512 million in September. The systematic futures category led the losses, with outflows of $574 million in September, adding to its growing loss of $8.1 billion through the third quarter. In contrast, global macro hedge funds received net inflows of $646 million. The global macro hedge fund category has raised $1.4 billion since January 2013. $706 million flowed out of funds with a Morningstar rating of 3-stars or less in September, while funds with above-average track records and no rating were stable. For the year through September, funds with no rating have raised $7.0 billion in assets, while rated funds have shed $10.5 billion.

October returns for the Morningstar MSCI Hedge Fund Indexes are based on funds that reported as of Nov. 22, 2013. September asset flows are based on funds that reported as of Nov. 14, 2013. Hedge fund investors, managers, consultants, and advisors can access additional information through Morningstar DirectSM, the company’s global research platform for institutions.

Morningstar

Press Release

BM

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