The Morningstar 1000 Hedge Fund Index rose 3.4 per cent in April-the largest one month-return since January 2006-bringing hedge fund returns into positive territory for 2009.
The Morningstar 1000 Hedge Fund Index rose 3.4 per cent in April-the largest one month-return since January 2006-bringing hedge fund returns into positive territory for 2009.
The Morningstar MSCI Composite Hedge Fund Index, which hedges US dollar exposure, rose 1.2 per cent, the largest monthly return since October 2007. This positive performance was greatly outstripped by the S&P 500 Index, which increased 9.6 per cent in April, its largest return since March 2000.
"Over the last two months, the bulls have dominated the markets, and stories of green shoots in the economy colored the financial media. The rally was led by higher-risk asset classes, including small-cap, financial sector, and emerging market stocks, as well as high-yield bonds and leveraged loans. Many hedge fund managers weren’t confident in the sustainability of the rally, and invested with a more conservative market exposure," says Nadia Papagiannis, Morningstar hedge fund analyst.
US convertible bonds benefited from the trend toward higher-risk, low-credit-quality investments. According to the Merrill Lynch All US Convertibles Index, these securities enjoyed their best month since 1987, with speculative-grade convertibles returning more than double the gains of investment-grade securities. The Morningstar Convertible Arbitrage Hedge Fund Index, the best-performing Morningstar hedge fund index this year, rose 5.1 per cent in April and 12.5 per cent year to date.
The Morningstar Distressed Securities Hedge Fund Index increased 2.1 per cent in April, the largest since the beginning of the credit crunch in mid 2007. In emerging market equities, Eastern European countries produced the best returns in April, although this region is still recovering from its early 2009 nosedive. The Morningstar MSCI Emerging Markets Hedge Fund Index rose 6.7 per cent in April and 7.4 per cent year to date.
The only losers in April were the Morningstar Global Trend and Global Non-Trend Hedge Fund Indexes, which dropped 1.7 per cent and 0.5 per cent respectively. A rise in industrial metals such as copper as well as a decline in the US dollar, contributed to some gains for these funds, which capitalize on macro-economic trends, but the overall lack of sustainable trends in many futures contract markets caused net losses for the month. Similarly, the Morningstar Equity Arbitrage Hedge Fund Index ended the month almost flat, at 0.2 per cent. Equity arbitrage funds that attempt to profit from declining volatility rose through much of April, but a temporary increase in volatility mid-month took back some gains.
According to Morningstar’s database, hedge funds overall continued to show a decline in outflows. In January, investors withdrew more than USD29bn from hedge funds, but February outflows totalled less than USD6bn, while March’s preliminary figure showed an even lower amount, at USD3.6bn.
Despite the overall March trend of outflows, developed Asia equity hedge funds actually had net inflows of USD4.1bn in March, and investors were rewarded. The Morningstar MSCI Japan Hedge Fund Index increased 2.5 per cent in April, while the broader Morningstar Developed Asia Equity Hedge Fund Index jumped 5.2 per cent.
