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Morningstar 1000 Hedge Fund Index fell 1.2 per cent in February

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The credit and equity markets experienced a sharp decline in February, as the US government announced its stimulus package and financial stability plan, according to a report from Morni

The credit and equity markets experienced a sharp decline in February, as the US government announced its stimulus package and financial stability plan, according to a report from Morningstar.

February saw a huge sell-off in US and European bank stocks caused by concerns of financial health and nationalization.

US bank stocks hit a 17-year low and spreads on corporate bonds widened.

The un-hedged Morningstar 1000 Hedge Fund Index and currency-hedged Morningstar with MSCI Composite (asset-weighted) Index dropped 1.2 per cent and 0.6 per cent respectively in February.

"Hedge fund managers, like other investors, are nervous about the efficacy and unpredictability of government involvement in the economy. They just don’t know what the US government will do next, and this uncertainty is wreaking havoc in the markets," says Nadia Papagiannis, Morningstar hedge fund analyst.

Widening spreads hurt hedge funds that invest in distressed debt, as lower-quality credits became cheaper. The Morningstar Distressed Securities Hedge Fund Index was one of the worst-performing category indexes, falling 4.1 per cent.

The Morningstar MSCI Specialist Credit and Relative Value Hedge Fund Indexes fell only 0.5 per cent and 0.1 per cent respectively, as some areas of the credit market, such as leveraged loans, performed better than others.

Convertible bonds lost value in February overall, but certain non-financial-sector convertibles saw gains. The Morningstar Convertible Arbitrage Hedge Fund Index remained positive for the second consecutive month, rising 0.2 per cent.

Also positive for a second month, the Morningstar Corporate Actions Hedge Fund Index rose 0.5 per cent. These funds benefited from some large mergers and acquisitions and increased government involvement – government-backed mergers and acquisitions accounted for 62 per cent of global volume in February, a record high according to Thomson Reuters.

The S&P 500, MSCI World, MSCI AC Asia, and MSCI Europe indexes declined more than ten per cent in February, helping the Morningstar Short Equity Hedge Fund Index to register a 2.9 per cent increase, beating out other categories by a wide margin.

European equity hedge funds fared better than US and Asian equity funds. The Morningstar Europe Equity Hedge Fund Index lost only 1.0 per cent, while the Morningstar US and Developed Asia Equity Hedge Fund Indexes dropped 2.6 per cent and 3.1 per cent respectively.

Global non-trend funds, those that make macro-economic bets, and global trend funds, those that bet on price trends in commodity and financial futures, showed mixed results in February. These funds took advantage of the rise in gold and the depreciation of the Japanese yen against the US dollar, but volatility in other commodities such as oil caused declines.

The Morningstar Global Trend and Global Non-Trend Hedge Fund Indexes fell 0.3 per cent and 0.5 per cent respectively.

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