The Morningstar MSCI Composite Hedge Fund Index, an asset-weighted composite of nearly 1,000 hedge funds in the Morningstar hedge fund database, rose 1.1% in July, outpacing the S&P 500’s 2.0% decline for the month.
“Global equity markets struggled in July as the United States approached the debt ceiling deadline and as concerns regarding the European debt crisis deepened,” says Terry Tian, alternative investment analyst for Morningstar. “Yet many hedge fund strategies delivered positive returns for the month.”
Trend-following strategies posted the largest gains in July, as gold prices advanced to new highs and US Treasuries continued to rally. The Morningstar MSCI Directional Trading Hedge Fund Index, which tracks funds betting on momentum in currency, commodity, equity, and bond markets, climbed 2.5% this month, much more than other hedge fund indexes.
Funds with a broader geographic focus also delivered strong results in July. Outperformance in Asian-pacific stock markets in particular helped to bolster the Morningstar MSCI Global Markets Hedge Fund Index, which increased 1.6%. Multi-strategy funds provided welcomed downside protection as well in July. The Morningstar MSCI Multi-Process Group Hedge Fund Index rose 0.5%.
European-equity focused hedge funds produced some of the worst results in July. The Morningstar MSCI Europe Hedge Fund Index slipped 0.8%, more than most other hedge fund indexes. These hedged strategies still managed to outperform the MSCI Europe Stock Index, which declined 3.4% amid mounting pressure from sovereign debt woes and riots in Greece.
Arbitrage strategies fell flat this month, with the Morningstar MSCI Relative Value Hedge Fund Index eking out a small increase of 0.1%. Following seven straight months of modest gains, the Morningstar MSCI Merger Arbitrage Hedge Fund Index fell 0.1% in July, as merger deal spreads (or profits) remained tight.
Funds in Morningstar’s diversified arbitrage and US long/short equity hedge fund categories netted the largest inflows in June, more than USD300 million each. The largest outflows came from the equity market neutral and multistrategy hedge fund categories, which leaked approximately USD143 million each. Overall, single-manager funds in Morningstar’s database experienced inflows of USD645 million in June, a significant drop from previous months. Hedge fund of funds in Morningstar’s database experienced outflows of USD124 million in June.
July returns for the Morningstar MSCI Hedge Fund Indexes are based on funds that reported as of August 11, 2011. June asset flows are based on funds that reported as of August 12, 2011.