June performance decline "a bad end to a good quarter for hedge funds", says Morningstar

June performance decline "a bad end to a good quarter for hedge funds", says Morningstar

Chicago-based investment research provider Morningstar says June marked a bad end to a good quarter for hedge fund performance. The Morningstar 1000 Hedge Fund Index fell 0.73 per cent during the month, pushing down second-quarter returns to 2.07 per cent and year-to-date performance to just 0.31 per cent as hedge funds struggle with poor market conditions.

"Equity markets suffered steep declines in June," says Morningstar hedge fund analyst Nadia Van Dalen. "Volatility returned to levels not seen since March, amid fears of recession and rising inflation. Most hedge funds are not immune to these economic shocks, despite what their name might imply."

There were significant exceptions, Van Dalen says. The Morningstar Global Trend Hedge Fund Index, which tracks funds that profit from price trends in futures, options and currencies, benefited from the sharp rise in commodity prices, returning more 18 per cent over the past 12 months, including 3.28 per cent in June.

Funds in the Morningstar Global Non-trend Hedge Fund Index, which take macroeconomic bets on interest rates and currencies, benefited from the falling dollar and the rising euro to gain 0.33 per cent in June and more than 12 per cent over the past 12 months.

The past year has also seen high volatility. Equity arbitrage funds that specialise in trading volatility helped drive the Morningstar Equity Arbitrage Hedge Fund Index to a gain of more than 8.57 per cent over 12 months and 1.12 per cent in June.

Not surprisingly, Van Dalen says, the top-performing categories also experienced the highest inflows. In the second quarter of the year, hedge fund investors poured more than USD6bn into global trend funds and USD2.4bn into global non-trend funds tracked by Morningstar, but fled US and European equity hedge funds, categories that saw outflows exceeding USD7.7bn and USD6.9bn respectively.

Morningstar's hedge fund flow data also show that in the second quarter assets moved to the Morningstar-rated 4- and 5-star hedge funds, while the 1-, 2-, and 3-star hedge funds saw redemptions. Four- and 5-star hedge funds received more than USD10bn in new assets, while 1- and 2-star hedge funds bled almost the same volume in assets in the quarter.

Overall hedge funds defied the trend of equity and bond markets in the second quarter. While mainstream asset classes markets experienced losses, the Morningstar 1000 index gained 2.07 per cent and the Morningstar Fund of Hedge Funds Index rose 1.43 per cent. Over the past year, the two hedge fund indices outperformed major global stock indexes, which experienced double-digit declines, with the exception of emerging markets, although the bond market outperformed both equities and hedge funds.

Morningstar, which has around 8,500 hedge funds and funds of hedge funds in its database, in February launched the Morningstar 1000 index, a global, broadly representative benchmark for hedge fund performance composed of the top 90 per cent of eligible assets in the firm's database. For the purposes of the index, Morningstar counts funds with shared portfolios as a single hedge fund, and excludes funds of hedge funds. The index is updated daily for the previous month-end, rebalanced monthly, and reconstituted semi-annually.

Further reading



Upcoming events

Upcoming training

Mon, 12/05/2014 (All day) - Dubai
Tue, 13/05/2014 (All day) - Dubai