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The Morningstar MSCI Composite AW Hedge Fund Index, an asset-weighted composite of nearly 1,000 hedge funds in the Morningstar Hedge Fund database, increased 0.1 per cent in April.
The S&P 500, meanwhile, rose 0.7 per cent while the small-cap Russell 2000 declined 3.9 per cent.
The Morningstar MSCI Composite AW Hedge Fund Index has increased 1.2 per cent for the year through April.
“Markets continued divergent performance in April,” says AJ D’Asaro, fund analyst at Morningstar. “US small-cap companies, traditionally a bulwark for hedge funds, declined further as investor sentiment reversed in small-cap growth stocks. European stocks, however, rebounded slightly on the Geneva agreement between Russia and the EU concerning Ukraine.”
Short-bias hedge funds benefited for the third straight month as overvalued stocks plummeted, especially in the technology sector. The Morningstar MSCI Short Bias All Size Hedge Fund Index increased 1.2 per cent in April, the largest increase of any Morningstar MSCI hedge fund index. This showing comes on the heels of a 4.4 per cent gain in February and 0.8 per cent gain in March. The Morningstar MSCI Short Bias All Size Hedge Fund Index has increased 5.5 per cent year to date.
Large differences between the performance of large-cap and small-cap stocks weighed on many hedge funds. The Morningstar MSCI North America Hedge Fund Index declined 0.2 per cent in April, while the S&P 500 Index rose 0.7 per cent. The Morningstar MSCI Small Cap Hedge Fund Index, which represents primarily small-cap long-short equity strategies, fell 1.0 per cent in April, while the Russell 2000 Index sank 3.9 per cent. The Morningstar MSCI North America Hedge Fund Index and the Morningstar MSCI Small Cap Hedge Fund Index rose 11.5 per cent and 16.1 per cent, respectively, for the 12 months ended April 2014, while the S&P 500 and Russell 2000 Indexes increased 20.4 per cent and 20.5 per cent, respectively, over the same period.
European stocks rallied with the Geneva accord on Ukraine signed April 17, but hedge funds largely missed the rally. The Morningstar MSCI Europe Hedge Fund Index was flat in April, as many funds were short or had significantly hedged exposures. Emerging markets hedge funds rebounded further in April after struggling in the first quarter with a strengthening US dollar and increased perception of political risk. The Morningstar MSCI Emerging Markets Hedge Fund Index rose 0.6 per cent, which brought its year-to-date increase to 0.7 per cent. In contrast, the unhedged MSCI Emerging Markets Index advanced 0.3 per cent in April, still failing to retrench its staggering loss of 6.5 per cent in January. The Morningstar MSCI Emerging Markets Hedge Fund Index and the MSCI Emerging Markets Index have fallen 1.2 per cent and 1.8 per cent, respectively, for the 12 months ended April 2014.
Managed futures hedge fund strategies faced headwinds in April, but were slightly positive as trends continued from the prior month. The Morningstar MSCI Directional Trading Hedge Fund Index, which includes both discretionary and systematic futures-based strategies, increased 0.1 per cent, and the Morningstar MSCI Systematic Trading Hedge Fund Index rose 0.2 per cent in April. For the 12 months ended April 2014, the Morningstar MSCI Directional Trading Hedge Fund Index decreased 1.3 per cent, and the Morningstar MSCI Systematic Trading Hedge Fund Index declined 5.4 per cent as hedge funds struggled with frequent reversals of investor sentiment in 2013.
Arbitrage strategies performed well in April. In the merger arbitrage and corporate activity space, deal flow was robust and many companies moved to spin off portions of their business to unlock value. The Morningstar MSCI Arbitrage Hedge Fund Index increased 0.5 per cent in April, and is up 4.9 per cent for the 12 months ended April 2014. The Morningstar MSCI Fixed Income Arbitrage Index also rose 0.6 per cent in April, and is up 3.1 per cent for the 12 months ended April 2014.
In aggregate, single-strategy hedge fund assets in Morningstar’s database grew by an estimated USD661 million in March. Four- and five-star Morningstar rated funds gained a collective USD612 million, while funds with average, below average, or very short track records gained a small amount. Systematic futures hedge fund assets continued their long decline in April, with USD447 million in outflows. Systematic futures were the hedge fund industry’s biggest loser over in 2013, with a staggering USD10.7 billion in outflows. Event-driven and long/short debt hedge funds experienced the greatest inflows in March, of USD264 million and USD321 million, respectively, as investors sought alternatives to the interest rate risk of high duration bonds. Global long/short equity also received inflows, of USD200 million, possibly reflecting investors’ more moderately bullish sentiment on equities in 2014. For the trailing 12 months, single-strategy hedge funds in Morningstar’s database have lost USD5.1 billion, with the majority of outflows coming from systematic futures hedge funds.
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