Morningstar Reports Hedge Fund Performance for the Second Quarter 2009, Asset Flows Through May

Date: Friday, July 24, 2009
Author: Morningstar

Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today reported preliminary hedge fund performance for the second quarter of 2009 and asset flows through May. For the quarter, the Morningstar 1000 Hedge Fund Index posted its largest quarterly increase, 9.25%. Previously, the index’s best result since its inception on Jan. 1, 2003, was a second-quarter 2003 rise of 7.40%. During the second quarter of 2009, the currency-hedged Morningstar MSCI Asset Weighted Hedge Fund Composite Index rose 5.12%, and the Morningstar MSCI Equal Weighted Hedge Fund Composite Index rose 8.77%. The substantially stronger increase of the equal-weighted hedge fund index indicates the lower-risk posture adopted by many of the industry’s biggest funds, which held them back during the quarter’s rally.

Leading the way were hedge funds that were most geared to the booming equity markets, the Morningstar Emerging Markets Hedge Fund Index and the Morningstar U.S. Small Company Equity Hedge Fund Index, rose 24.93% and 19.72%, respectively. These gains were achieved almost exclusively in the first two months of the quarter, as the two categories inched out only small advances during the choppy month of June. Similarly, the currency-hedged Morningstar MSCI Emerging Market Index increased 1.90% in June and 18.76% for the quarter. In fact, June overall was a subdued time period, with nine of Morningstar’s 18 hedge fund indexes rising or falling less than 1% for the month.

Other hedge fund indexes that were exposed to equities also fared well. The Morningstar Developed Asia Equity Hedge Fund Index rose 13.33%, and the Morningstar U.S. Equity Hedge Fund Index rose 12.72%. The laggard among net long equity indexes, the Morningstar MSCI Europe Hedge Fund Index, still managed to rise a healthy 4.97% in the quarter, although these results might be considered disappointing given that the MSCI Europe Stock Index soared by 22.96% in U.S. dollars. This discrepancy occurred largely because the MSCI Europe Stock Index enjoyed currency gains resulting from the appreciation of the U.S. dollar against the Euro, while the funds in the hedge fund index were mostly denominated in local currencies.

Following on the heels of the equity hedge fund indexes were those funds exposed to less-liquid or lower-quality debt markets. Such markets frequently trade in tandem with equities, rising when economic optimism abounds, and declining on economic fears. For much of the second quarter, these debt markets were on the rebound. The Morningstar Corporate Actions Hedge Fund Index jumped 12.55%; the Morningstar Global Debt Hedge Fund Index rose 10.53% (aided by the slump in the U.S. dollar); the Morningstar Convertible Arbitrage Hedge Fund Index grew by 10.00%; the Morningstar Distressed Securities Hedge Fund Index was up 8.68%; the Morningstar Debt Arbitrage Hedge Fund Index appreciated by 8.52%; and finally the Morningstar MSCI Specialist Credit Index gained 7.45%. Once again, these indexes primarily achieved their successes during April and May, with only the Distressed Securities Index gaining more than 3% in June.

At the bottom of the totem pole for single-strategy hedge funds were those funds designed to have limited responsiveness to either the stock or bond markets. The Morningstar MSCI Relative Value Hedge Fund Index grew by 6.36% and the Morningstar Equity Arbitrage Hedge Fund Index rose 4.07%, good results for indexes that are designed to hedge away most systematic equity exposure. The Morningstar Global Non Trend Hedge Fund Index grew by 3.43%. Its counterpart, the Global Trend Hedge Fund Index, was buffeted by a decidedly choppy climate for commodities pricing, and lost 0.53%. Finally, the Morningstar Short Equity Index had a surprising gain in the quarter. Given the steepness of the market’s advance, its gain of 2.00% should be a welcome surprise for short equity investors.

The quarter was not only the largest absolute gain for the Morningstar Hedge Fund Index 1000, but it also represented that single-strategy index’s greatest quarterly victory over the Morningstar Hedge Fund of Funds Index. At 6.22%, the Hedge Fund of Funds Index lagged the MHFI 1000 by more than 300 basis points, as hedge funds of funds suffered from having adopted very conservative positions during the rocky first quarter of 2009. In contrast, the Morningstar Multi-Strategy Hedge Fund Index just about kept pace with the MFHI 1000, picking up 9.09%.

`Smaller single-strategy funds went full throttle back into risky assets in May and June. Overall, hedge funds outperformed both the U.S. stock and bond markets for the first half of the year, although they failed to keep pace with most overseas equities markets. Larger funds were more cautious following the difficult 2008 market, and lagged smaller funds, as evidenced by the gap between the Morningstar MSCI Asset Weighted and Equal Weighted Hedge Fund Composite Indexes,` said Ben Alpert, Morningstar hedge fund analyst.

June returns and May asset flows for the Morningstar Hedge Fund Indexes are based on funds that reported as of July 15, 2009. Returns for the Morningstar MSCI Hedge Fund Indexes are based on funds that reported June performance as of July 15, 2009. Hedge fund investors, managers, consultants, and advisors can access additional information through Morningstar® AltvestSM, the company’s research platform designed for hedge funds. Visit www.altvest.com for more information.

As announced in September 2008, Morningstar is also now calculating hedge fund indexes by applying the MSCI Hedge Fund Index Methodology and Hedge Fund Classification Standard to Morningstar’s hedge fund database. These indexes demonstrate the performance of hedge funds to investors who have hedged their currency exposure back into U.S. dollars. The MSCI Hedge Fund Index Methodology classifies hedge funds by investment process, geography, and asset class.

Morningstar has more than 8,000 hedge funds and funds of hedge funds in its database. The Morningstar 1000 Hedge Fund Index, a global, broadly representative benchmark for hedge fund performance, has return history from January 2003. The index comprises the top 90% of eligible assets in Morningstar’s hedge fund database. For the purposes of the index, Morningstar counts funds with shared portfolios as a single hedge fund; funds of hedge funds are excluded from consideration. The index is updated daily for the previous month-end, rebalanced monthly, and reconstituted semi-annually. In addition, Morningstar has 17 category indexes and four broad category indexes based on Morningstar’s strategy-specific classification system for hedge funds. Morningstar’s hedge fund indexes are not investable.

This press release is not intended to be an offer or solicitation for the sale of hedge funds. The information is not warranted to be accurate, complete, or timely. When considering hedge funds, investors should consider various risks, including the fact that some products engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees, and in many cases the underlying investments are not transparent and are known only to the investment manager. The high degree of leverage that is often obtainable in trading can lead to large losses as well as gains. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.