Morningstar Index Shows Hedge Funds Up 1.1% In October

Nov 23 2011 | 9:04am ET

The Morningstar MSCI Composite Hedge Fund Index added 1.1% in October, well below the 10.3% growth registered by the MSCI World NR Stock Index.

“Though most strategies posted positive figures in October, hedge funds overall failed to fully participate in the equity market’s massive rebound in October," said Josh Charney, alternative investments analyst at Morningstar. "The abruptness of the market’s reversal, coupled with lingering bearish sentiment, likely caught some defensively positioned managers off guard."

The Morningstar MSCI Composite Hedge Fund Index is an asset-weighted composite of nearly 1,000 hedge funds in the Morningstar database.

Broken down by strategy, the Morningstar data shows that stock-picking hedge funds “significantly lagged” U.S. and European equity markets which surged in October as the Eurozone agreed to allow Greece to write down its debt. The Morningstar MSCI North America and the Morningstar MSCI Europe Hedge Fund Indexes rose only 5.0% and 3.4%, respectively.

Emerging markets strategies rose only 4.1% in October, even though emerging markets stocks outpaced those of developed markets. Similarly, the Morningstar MSCI Small Cap Hedge Fund Index rose only 6.8% relative to the Russell 2000 TR stock index's 15.1% jump.

Relative value strategies were up 1.0% and merger arbitrage strategies up 1.5% in October, the best monthly returns for both in 2011.

Morningstar says credit strategies “failed to deliver last month as thawing sovereign debt fears in the Eurozone dampened bond performance.” Specialist credit strategies fell flat in October, while long-short credit strategies fell 0.8%. Fixed income arbitrage funds fared somewhat better, adding 0.8%. Distressed strategies gained 1.8% in October, after falling 3.5% and 4.2% in the previous two months, respectively.

Momentum-driven hedge fund strategies posted losses for the third straight month. Systematic trading strategies (including hedge funds trading futures contracts according to price trends across asset classes) fell 3.0% in October, more than all other Morningstar hedge fund categories.

Single-manager hedge funds saw net outflows of $165 million in September, with U.S. long-short equity strategies posting the biggest losses, at $328 million. That said, single-manager funds together brought in $19.1 billion over the last nine months and $20.2 billion over the last 12 months, through September.

Funds of funds, on the other hand, continued to lose assets, posting overall net outflows of $589 million in September, for a total loss of $2.5 billion over the last 12 months.

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