The Morningstar 1000 Hedge Fund Index posted its largest quarterly increase in the second quarter of 2009, up 9.25 per cent.
The Morningstar 1000 Hedge Fund Index posted its largest quarterly increase in the second quarter of 2009, up 9.25 per cent.
Previously, the index’s best result since its inception on 1 January 2003 was a second-quarter 2003 rise of 7.40 per cent.
During the second quarter of 2009, the currency-hedged Morningstar MSCI Asset Weighted Hedge Fund Composite Index rose 5.12 per cent, and the Morningstar MSCI Equal Weighted Hedge Fund Composite Index rose 8.77 per cent. The substantially stronger increase of the equal-weighted hedge fund index indicates the lower-risk posture adopted by many of the industry’s biggest funds, which held them back during the quarter’s rally.
Leading the way were hedge funds that were most geared to the booming equity markets, the Morningstar Emerging Markets Hedge Fund Index and the Morningstar US Small Company Equity Hedge Fund Index, rose 24.93 per cent and 19.72 per cent, respectively. These gains were achieved almost exclusively in the first two months of the quarter, as the two categories inched out only small advances during the choppy month of June.
Similarly, the currency-hedged Morningstar MSCI Emerging Market Index increased 1.90 per cent in June and 18.76 per cent for the quarter. In fact, June overall was a subdued time period, with nine of Morningstar’s 18 hedge fund indexes rising or falling less than one per cent for the month.
Other hedge fund indexes that were exposed to equities also fared well. The Morningstar Developed Asia Equity Hedge Fund Index rose 13.33 per cent, and the Morningstar US Equity Hedge Fund Index rose 12.72 per cent.
The laggard among net long equity indexes, the Morningstar MSCI Europe Hedge Fund Index, still managed to rise a healthy 4.97 per cent in the quarter, although these results might be considered disappointing given that the MSCI Europe Stock Index soared by 22.96 per cent in US dollars. This discrepancy occurred largely because the MSCI Europe Stock Index enjoyed currency gains resulting from the appreciation of the US dollar against the Euro, while the funds in the hedge fund index were mostly denominated in local currencies.
Following on the heels of the equity hedge fund indexes were those funds exposed to less-liquid or lower-quality debt markets. Such markets frequently trade in tandem with equities, rising when economic optimism abounds, and declining on economic fears. For much of the second quarter, these debt markets were on the rebound.
The Morningstar Corporate Actions Hedge Fund Index jumped 12.55 per cent; the Morningstar Global Debt Hedge Fund Index rose 10.53 per cent (aided by the slump in the US dollar); the Morningstar Convertible Arbitrage Hedge Fund Index grew by 10.00 per cent; the Morningstar Distressed Securities Hedge Fund Index was up 8.68 per cent; the Morningstar Debt Arbitrage Hedge Fund Index appreciated by 8.52 per cent; and finally the Morningstar MSCI Specialist Credit Index gained 7.45 per cent.
Once again, these indexes primarily achieved their successes during April and May, with only the Distressed Securities Index gaining more than three per cent in June.
At the bottom of the totem pole for single-strategy hedge funds were those funds designed to have limited responsiveness to either the stock or bond markets. The Morningstar MSCI Relative Value Hedge Fund Index grew by 6.36 per cent and the Morningstar Equity Arbitrage Hedge Fund Index rose 4.07 per cent, good results for indexes that are designed to hedge away most systematic equity exposure.
The Morningstar Global Non Trend Hedge Fund Index grew by 3.43 per cent. Its counterpart, the Global Trend Hedge Fund Index, was buffeted by a decidedly choppy climate for commodities pricing, and lost 0.53 per cent. Finally, the Morningstar Short Equity Index had a surprising gain in the quarter. Given the steepness of the market’s advance, its gain of 2.00 per cent should be a welcome surprise for short equity investors.
The quarter was not only the largest absolute gain for the Morningstar Hedge Fund Index 1000, but it also represented that single-strategy index’s greatest quarterly victory over the Morningstar Hedge Fund of Funds Index. At 6.22 per cent, the Hedge Fund of Funds Index lagged the MHFI 1000 by more than 300 basis points, as hedge funds of funds suffered from having adopted very conservative positions during the rocky first quarter of 2009. In contrast, the Morningstar Multi-Strategy Hedge Fund Index just about kept pace with the MFHI 1000, picking up 9.09 per cent.
"Smaller single-strategy funds went full throttle back into risky assets in May and June. Overall, hedge funds outperformed both the US stock and bond markets for the first half of the year, although they failed to keep pace with most overseas equities markets. Larger funds were more cautious following the difficult 2008 market, and lagged smaller funds, as evidenced by the gap between the Morningstar MSCI Asset Weighted and Equal Weighted Hedge Fund Composite Indexes," says Ben Alpert, Morningstar hedge fund analyst.
