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Morningstar MSCI Composite Hedge Fund Index up 1.9 per cent in January

The Morningstar MSCI Composite Hedge Fund Index, an asset-weighted composite of nearly 1,000 hedge funds in the Morningstar Hedge Fund database, rose 1.9 per cent in January and advanced 6.3 per cent for the trailing 12 months.

Almost all Morningstar MSCI hedge fund indexes rose in January, and the trailing 12 months showed declines in only the short bias and systematic trading categories.

“Reduced global economic and political uncertainty during January fuelled a broad increase in appetite for risky assets,” says Philip Guziec, alternative investing strategist at Morningstar. “Excluding the short biased category, all hedge fund strategies were up for the month, and the most risk-sensitive strategies posted the strongest performance.”

January started with a two-day rally in equity markets that accounted for most of the 5.2 per cent rise in the SandP 500 Index for the month. The Morningstar MSCI North America Hedge Fund Index, which primarily includes long-short equity hedge funds, ended the month up 2.3 per cent. Small-cap strategies faired even better. The Russell 2000 Index jumped 6.3 per cent, while the Morningstar MSCI Small Cap Hedge Fund Index rose 3.9 per cent.

The Morningstar MSCI Emerging Markets Hedge Fund Index also rose substantially, up 3.0 per cent in January, driven by positive economic news from China about GDP and exports. These positive signals also supported the performance of the Morningstar MSCI Asia Pacific Hedge Fund Index and MSCI AC Asia Index, which climbed 4.9 per cent and 2.5 per cent, respectively. Short sellers were caught short by the broad-based rally, however, pushing the Morningstar MSCI Short Bias Hedge Fund Index down 5.2 per cent.

Widespread investor optimism also sent less risky fixed-income strategies, such as those involving Treasuries and investment-grade corporate bonds, down during January, but high-yield and relative-value hedge fund strategies posted gains. The Morningstar MSCI Long-Short Credit and Fixed Income Arbitrage Hedge Fund Indexes increased 0.7 and 0.9 per cent, respectively, in January. The month-long equity rally as well as rising prices across the energy, agricultural, and metal commodity futures markets also supported price-trend following managed futures strategies in January, leading to a 2.8 per cent rise in the Morningstar MSCI Systematic Trading Hedge Fund Index. January’s uptick was not enough to offset previous losses, however, and the Systematic Trading Hedge Fund Index was down 1.2 per cent over the past 12 months.

In December 2012, single-manager funds in Morningstar’s Hedge Fund Database saw outflows of USD4.7bn, marking the fourth consecutive month of outflows, and representing more than half of the USD7.0bn that investors pulled from hedge funds in the database during 2012. This was a sharp reversal from investor behaviour seen during 2011 and 2010, when funds in the Morningstar Hedge Fund Database received inflows of USD17.9bn and USD10.1bn, respectively.

The largest redemptions came from multistrategy hedge funds, which gave up USD1.7bn, or 35 per cent of the redemptions in the Morningstar database for the month. Over the calendar year 2012, however, multistrategy funds in the database gathered more assets than any other category of USD4.2bn. Hedge funds in the systematic futures category, which trade futures contracts according to trend-following and momentum-based strategies, also suffered in December, losing USD826m, followed by US long/short equity hedge funds, which lost USD500m.

Only the distressed securities, emerging market long-only equity, and debt arbitrage hedge fund categories posted inflows of USD46m, USD25m, and USD2m, respectively, in December.

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