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“April was a solid month for hedge funds,” said John Rekenthaler, Morningstar’s vice president of research. “Nearly every category of hedge fund experienced a gain in April, as most global assets rose for the month. The main exceptions were in Europe, which suffered from Greece’s economic crisis, but even European hedge funds fared well if they reduced their exposure to the euro by hedging into other currencies.”

The strongest performer among the Morningstar Hedge Fund Indexes was the U.S. Small Cap Equity category, with a gain of 2.6%. Once again, small U.S. stocks charged to a large gain, as the Russell 2000 Stock Index increased 5.7% in April, and 15.0% for the year to date. With a much more modest year-to-date rise of 5.5%, funds in the Morningstar U.S. Small Cap Equity Hedge Fund Index generally shied away from maintaining anything like full exposure to the stock market.

With the U.S. economy strengthening, the economically sensitive categories of Distressed Securities, Debt Arbitrage, and Corporate Actions all performed well. At an increase of 2.3%, the Morningstar Distressed Securities Hedge Fund Index was the month’s second-best performer, and remains in first place for the year to date among hedge fund categories with a rise of 9.9%. Close behind is the Corporate Actions Hedge Fund Index with a 2010 gain through the end of April of 8.1%.

Less happily, the Morningstar Short Equity Hedge Fund Index had a disappointing loss of 4.1% for the month, as the short managers in the index were neither able to hedge their stock-market exposure, nor to target relatively weak securities. The Short Equity index is now down 6.4% for the year to date through April, continuing an almost unabated decline since March 2009. The Morningstar Equity Arbitrage Hedge Fund Index shed 0.2% for the month, as equity-arbitrage managers struggled to find their bearings in a 2010 market that has seen them drop 1.3% for the year to date. Finally, the unhedged Morningstar Europe Equity Hedge Fund Index fell 0.5% for the month, while the currency-hedged Morningstar MSCI Europe Hedge Fund Index rose 0.7%.

With broadly diversified hedge funds, the Morningstar Multi-Strategy Hedge Fund Index comfortably outpaced the typical hedge fund of funds, picking up 0.7% in April as opposed to the 0.2% increase for the Morningstar Hedge Funds of Funds Index. For the year to date through April, the Multi-Strategy index has a modest but significant increase of 2.1%, while the Funds of Funds index is barely positive at 0.1%. In aggregate, Funds of Funds have struggled to keep pace with Multi-Strategy funds in recent years, and 2010 is appearing to be no exception.

Single-strategy hedge funds in the Morningstar database saw overall inflows of $2.7 billion in March, bringing flows into positive territory for the year of approximately $835 million through the first quarter. Source

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