The Morningstar 1000 Hedge Fund Index fell 0.3 per cent in June, ending the quarter with a 3.6 per cent loss and down 2.2 per cent for the year to date.
The currency-hedged Morningstar MSCI Composite Index also dipped slightly in June, by 0.2 per cent, finishing the quarter down 1.5 per cent.
Losses in May dragged quarterly results down for almost every hedge fund strategy, particularly the equity strategies. Global equities tanked in the wake of Europe’s debt crisis, uncertainty regarding financial regulation, and disappointing economic indicators in the US.
Hedge funds held up better than the unhedged markets, but nonetheless suffered losses. The Morningstar Europe Equity Hedge Fund Index lost 8.3 per cent against the MSCI Europe NR stock index’s 15.2 per cent quarterly plunge, while the Morningstar US Equity Hedge Fund Index fell only 4.7 per cent over the quarter against the S&P 500’s 11.4 per cent decline.
"The markets took hedge funds downhill in the second quarter, but in the end, many arrived with their hats still on," says Nadia Papagiannis, alternative investments strategist for Morningstar. "Whereas absolute returns are not always possible for hedge funds, hedged strategies do tend to protect investors’ wealth during sell-offs."
The credit markets also experienced major turbulence. Besides sovereign debt problems in European countries such as Greece and Spain, the US municipal market deteriorated, as states such as Illinois and California face large deficits and financing difficulties. Debt-oriented hedge funds found safety in US Treasuries and sovereign credit default swaps. The Morningstar MSCI Specialist Credit and the Morningstar Debt Arbitrage Hedge Fund indexes concluded the quarter with minor losses of 0.3 per cent and 0.1 per cent, respectively.
Volatility and quick reversals in trading patterns in May and June did not bode well for funds in the Morningstar Global Trend Hedge Fund Index that aim to profit from longer-term price trends in derivatives. The index fell 4.0 per cent in May and recovered 0.4 per cent in June. Sustained upward price trends in US and Japanese government bonds contributed to profits in June.
Merger arbitrage also experienced some modest gains in June, although overall US merger and acquisition deal volume for the year to date fell to its lowest point since 2003, according to Mergermarket. Tightening spreads contributed to profits in June, though, and pockets of optimism were seen in smaller-capitalization deals and in countries such as India. The Morningstar MSCI Merger Arbitrage Hedge Fund index gained 0.5 per cent in June and 0.1 per cent for the quarter.
Corporate event-driven strategies such as merger arbitrage saw inflows in May. Overall, funds in Morningstar’s database pulled in USD1.2bn for the month, although these funds have experienced net outflows of USD2.1bn in the first five months of the year. Multi-strategy funds in the database suffered significant withdrawals year to date of USD2.7bn.