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Morningstar 1000 Hedge Fund Index up 2.1 per cent in March

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Preliminary results show the Morningstar 1000 Hedge Fund Index rose 2.1 per cent in March, while the currency-hedged Morningstar MSCI Asset-Weighted Hedge Fund Composite Index increased

Preliminary results show the Morningstar 1000 Hedge Fund Index rose 2.1 per cent in March, while the currency-hedged Morningstar MSCI Asset-Weighted Hedge Fund Composite Index increased 0.1 per cent.

Year to date these indexes ended almost flat. The Morningstar 1000 Hedge Fund Index dropped 0.1 per cent for the quarter while the Morningstar MSCI Asset-Weighted Hedge Fund Composite Index rose 0.5 per cent.

Equity markets around the world significantly rebounded in March as appetite for risk returned, especially in emerging markets. Positive lending and manufacturing news in China coupled with higher commodity prices, which helped stocks in other emerging economies such as Russia, drove the Morningstar MSCI Emerging Markets and Morningstar Emerging Markets Hedge Fund Indexes to increase 4.2 per cent and 6.2 per cent, respectively.

"In March we saw a recovery in equity and some credit markets, which helped hedge funds post small gains. But many hedge fund managers, believing that the economy is not yet out of hot water, continued to remain cautious, and were not strongly positioned to participate in the market rally," says Nadia Papagiannis, Morningstar hedge fund analyst.

The Morningstar MSCI Developed Markets Hedge Fund Index rose only 1.1 per cent in March compared to the MSCI World Index, which climbed 7.2 per cent. 

The Treasury EuroDollar spread-the difference between interest rates on inter-bank loans and T-bills-narrowed slightly during the month indicating an increase in market liquidity. The number of new investment-grade corporate bonds doubled in the first quarter over the first quarter of 2008, bolstered by government-guaranteed debt of financial institutions. High-yield bonds fared particularly well, although the lowest-rated debt instruments suffered some from illiquidity.

The Morningstar Distressed Securities Hedge Fund Index rose 1.2 per cent in March, but declined 1.7 per cent over the quarter, while the Morningstar Global Debt Hedge Fund Index rose 2.4 per cent in March and 0.4 per cent for the quarter.

Convertible bonds rallied in March, as the extremely wide spreads caused by a forced sell off late last year made these bonds cheap for investors to purchase. The Morningstar Convertible Arbitrage Hedge Fund Index rose 3.9 per cent in March and 7.0 per cent over the quarter, making it the best-performing hedge fund category index.

Convertible arbitrage and short equity hedge funds in Morningstar’s database were the only categories to receive inflows in March-these funds saw inflows of USD45m and USD42m, respectively. In aggregate, hedge funds in the database, excluding hedge funds of funds, experienced net outflows of USD4.2bn in February and USD31.1bn year to date.

The Morningstar Corporate Actions Hedge Fund Index, which includes funds that attempt to profit from mergers and acquisitions, IPOs, spin-offs, and capital restructuring, increased 2.2 per cent in March and 3.4 per cent for the quarter. Mergers and acquisitions in the first quarter fell to levels not seen since 2004, according to Dealogic, but deals from bankruptcies jumped in March, especially in the US and Japan. Deal volume from private-equity leveraged buyouts hit its lowest point since 1996. Global IPOs also fell by almost half in the first quarter compared to the first quarter of 2008.

Global trend-following hedge funds, which profit from sustained upward or downward price trends in financial and commodity futures, saw a difficult month, as many contracts-most notably oil and gold-whipsawed during March. The Morningstar Global Trends Hedge Fund Index dropped 2.0 per cent in March and 4.1 per cent over the quarter.

On the bright side, fund managers in the Morningstar Global Non-Trend Index who tactically bet on fundamental macro-economic moves in the market benefited from a rally in government bonds and stocks after the Federal Reserve and Bank of England implemented quantitative easing. This index rose 0.5 per cent in March, but declined 0.1 per cent over the quarter.

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