Hedge funds suffer mild setback in November

Date: Wednesday, December 29, 2010
Author: Morningstar

The Morningstar 1000 Hedge Fund Index declined 0.8%, while the currency-hedged Morningstar MSCI Composite Index dropped 0.1%. For the year to date through November, these indexes have risen 6.1% and 7.2%, respectively. Both of these figures handily beat the performance of global stocks through November, but performance for the year to date is less than one-third of the performance over the same period in 2009. 

"Hedge fund performance so far in 2010 pales in comparison to 2009," says Nadia Papagiannis (pictured), alternative investment strategist for Morningstar. "But that's to be expected after the dramatic recovery in both credit and equity markets in 2009." 
 
Japanese equity strategies fared best in November. The Morningstar MSCI Japan Hedge Fund Index increased 2.9% against the 2.1% rise of the MSCI Japan Equity Index. However, US equity hedge fund strategies exhibited the best relative performance in November. The Morningstar US Equity Hedge Fund Index rose 1.3% even though the S&P 500 Index ended the month flat. Hedge funds focused on smaller-capitalisation US stocks did not fare as well, and substantially under performed the Russell 2000 Index, which climbed 3.5% in November. The Morningstar US Equity and US Small Cap Equity Hedge Fund Indexes rose 8.6% and 6.7%, respectively, for the year-to-date through November. 
 
European equity hedge fund strategies experienced some of the largest losses in November, as the European stock markets roiled over sovereign debt concerns and the Euro depreciated against other major currencies. The Morningstar Europe Equity Hedge Fund Index fell 3.5%, pushing year-to-date returns into negative territory. 
 
Even worse than European equity performance, though, was the performance of trend-following, momentum strategies. The Morningstar Global Trend Hedge Fund Index dropped 3.9% this month, as upward price trends in stocks, bonds, and commodities early in the month sharply reversed. Funds in the Morningstar Global Non-trend Hedge Fund Index, which attempt to profit from global macroeconomic fundamentals, also experienced losses, but many funds were able to hedge their declines through credit default swaps or put options.     
 
Funds in Morningstar's Corporate Action Hedge Fund Index, those that take advantage of corporate events such as restructurings and spinoffs, profited in November. These funds participated in events such as the General Motors initial public offering and a tender offer of Ford convertible bonds, for example. The Morningstar Corporate Actions Hedge Fund Index rose 1.2% in November, and is up 14.4% for the year to date.
 
November marked the third consecutive month of inflows for hedge funds of USD1.2 billion, although for the year to date through October, hedge funds in the database have still netted outflows of USD1.4 billion. Of all hedge fund strategies, corporate actions and global non-trend hedge funds in Morningstar's database received the largest share of inflows - USD1.6 and USD4.5 billion, respectively, through October. Global Debt hedge funds in our database bled approximately USD413 million in assets in October and USD1.8 billion over the first 10 months of the year.
 
November returns for the Morningstar Hedge Fund Indexes are based on funds that reported as of December 21, 2010. November returns for the Morningstar MSCI Hedge Fund Indexes and October asset flows are based on funds that reported as of December 17, 2010.