Fri, 01/08/2014 - 14:30
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 1.1 per cent in June, along with global stock and bond indices.
The MSCI World Index climbed 1.8 per cent while the Barclays Global Aggregate Bond Index rose 0.7 per cent.
The Morningstar MSCI Composite AW Hedge Fund Index has increased 3.7 per cent for the year through June.
“The second quarter was marked by volatility in small-cap and international equities,” says AJ D’Asaro, alternative strategies analyst for Morningstar. “However, despite increasing geopolitical tension in Ukraine and Gaza, almost all markets finished the month of June and the second quarter with substantial gains.”
The emerging-markets rebound continued for the fourth straight month in June as global economic recovery seemed imminent. The Morningstar MSCI Emerging Markets Hedge Fund Index rose 1.3 per cent in June, which brought its year-to-date increase to 4.0 per cent. In contrast, the unhedged MSCI Emerging Markets Index advanced 2.7 per cent in June, for a year-to-date increase of 6.1 per cent. Hedge funds were able to mitigate volatility in the beginning of the year, falling only 1.9 per cent in January, while the unhedged index fell 6.5 per cent. However, the MSCI Emerging Markets Index has outperformed the hedge fund index on an absolute basis. The Morningstar MSCI Emerging Markets Hedge Fund Index and the MSCI Emerging Markets Index have risen 5.7 per cent and 14.3 per cent, respectively, for the 12 months ended June 2014.
US unemployment declined to its lowest level since September 2008, which buoyed North American equity hedge funds. The Morningstar MSCI North America Hedge Fund Index increased 1.9 per cent in June, while the S&P 500 Index rose 2.1 per cent. The Morningstar MSCI Small Cap Hedge Fund Index, which represents primarily small-cap long-short equity strategies, rose 2.4 per cent in June, while the Russell 2000 Index climbed 5.3 per cent. The Morningstar MSCI North America Hedge Fund Index and the Morningstar MSCI Small Cap Hedge Fund Index rose 2.6 per cent and 1.9 per cent, respectively, for the quarter ended June 2014, while the S&P 500 and Russell 2000 Indexes increased 5.2 per cent and 2.1 per cent, respectively, over the same period.
Managed futures hedge fund strategies benefitted from an extension of price trends in June. The Morningstar MSCI Directional Trading Hedge Fund Index, which includes both discretionary and systematic futures-based strategies, increased 1.2 per cent, and the Morningstar MSCI Systematic Trading Hedge Fund Index rose 0.7 per cent in June. For the year-to-date period ended June 2014, the Morningstar MSCI Directional Trading Hedge Fund Index increased 0.9 per cent, and the Morningstar MSCI Systematic Trading Hedge Fund Index declined 0.7 per cent as hedge funds struggled to make up losses from the temporary reversal of investor sentiment in January 2014.
Arbitrage strategies performed well in June. In the merger arbitrage and corporate activity space, deal flow was robust, and many so-called “inversion” deals were announced this year. The Morningstar MSCI Arbitrage Hedge Fund Index increased 0.7 per cent in June, and is up 3.2 per cent for the six months ended June 2014. The Morningstar MSCI Fixed Income Arbitrage Index also rose 0.5 per cent in June, and is up 2.4 per cent for the six months ended June 2014.
In aggregate, single-strategy hedge fund assets in Morningstar’s database grew by a meagre USD78 million in May. Funds with less than a three-year track record gained a collective USD806 million, while three-star Morningstar-rated funds lost USD872 million. For the year through May, four- and five-star funds gained USD4.6 billion, while funds with average or below-average track records shed USD3.0 billion.
Systematic futures hedge funds continued to see outflows, losing USD794 million in May and USD2.4 billion year-to-date through May. However, the pace of redemptions has slowed since 2013, when the category lost a staggering USD10.7 billion.
Long/short debt hedge funds experienced the greatest inflows in May, USD641 million, as investors sought alternatives to the interest-rate risk of high-duration bonds. Asset flows in other hedge fund categories were unremarkable. For the period ended May 2014, single-strategy hedge funds in Morningstar’s database represented USD344 billion of assets, with the largest categories—global macro, multi-strategy, and US long/short equity—making up approximately 50 per cent of total assets.
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