Morningstar 1000 Hedge Fund Index posts largest increase since inception

Date: Friday, June 19, 2009
Author: Hedgeweek.com

The Morningstar 1000 Hedge Fund Index posted its largest monthly increase in May since its January 2003 inception, rising 6.7 per cent for the month and 9.7 per cent for the first five months of the year.

May was a strong month for the asset-weighted, currency-hedged Morningstar MSCI Hedge Fund Index, which also posted its largest one-month increase since January 2003, rising 3.7 per cent in May and 5.5 per cent for the first five months of the year.

European and developed Asian equity markets outpaced the US in May, but the real surge came from the rebound of emerging market equities. The unhedged Morningstar Emerging Market Hedge Fund Index increased 13.5 per cent, while the currency-hedged Morningstar MSCI Emerging Markets Hedge Fund Index rose 9.8 per cent. These indexes rose 25.2 per cent and 17.6 per cent, respectively, over the last five months.

The US dollar declined against many currencies in May, including those of emerging market countries, triggered by fears of a US government debt downgrade. Potential International Monetary Fund funding also whetted investors' appetite for risk in emerging market countries. The strongest performance was in India, Russia, Eastern Europe, and Brazil, driven largely by their financial and energy sectors.

"Emerging markets saw a large run-up in May, fuelled by US inflation expectations and commodity supply concerns. Hedge fund managers trading in these markets remained cautious, though, believing that the emerging world is still very risky, and sharp corrections are possible," says Nadia Papagiannis, Morningstar hedge fund analyst.

Commodity prices, especially oil and gold, climbed dramatically in May-the S&P GSCI Energy and Gold Indexes rose 25.4 per cent and 9.8 per cent, respectively. These increases along with upward price trends in currencies-namely the Canadian Dollar, Australian Dollar, and British Pound against the US dollar- boosted profits for funds in the Morningstar Global Trend Hedge Fund Index, which rose 3.6 per cent in May.

Some funds in the Morningstar Global Non-Trend Hedge Fund Index, which take macro-economic bets, as well as funds in the Morningstar Debt Arbitrage Hedge Fund Index took advantage of a sharp steepening in the US yield curve and global credit market volatility in late May. These indexes rose 3.8 per cent and 4.4 per cent, respectively, in May.

Narrowing credit spreads paid off for the long credit bets taken by fund managers in the Morningstar Global Debt and Convertible Arbitrage Hedge Fund Indexes. These indexes increased 6.1 per cent and 4.6 per cent, respectively, in May.

Single strategy hedge funds in the Morningstar database saw net flows in April of USD6.9bn. Hedge funds in the Morningstar Europe Equity category saw the largest inflows of USD2.3bn, while hedge funds in the Morningstar Multi Strategy category saw the largest outflows of USD2.7bn.

For the year to date through April, USD7.1bn flowed out of hedge funds and hedge funds of funds in the Morningstar database.

Single manager hedge funds, including funds in the Morningstar Multi Strategy Hedge Fund Index, outpaced funds in the Morningstar Hedge Fund of Fund Index by a wide margin, both in May and for the first five months of the year. These indexes rose 6.7 per cent and 5.5 per cent, respectively, in May, and 9.7 per cent and 5.4 per cent, respectively, for the first five months of the year.