Morningstar: Emerging Markets Top Other Hedge Funds, Trail Index

Jan 18 2008 | 8:34am ET

Emerging markets hedge funds drastically outpaced their fellow hedge fund strategies last year, but that may be less impressive than it sounds.

The strategy of the year returned 31.97% in 2007, Morningstar reports, after a 4.07% surge in the fourth quarter. That’s better than twice the return of the average hedge fund, which added 14.13% on the year (1.98% in Q4), but quite a bit behind the MSCI Emerging Markets Index, which soared 36.48% last year.

Compared to the broader markets, however, hedge funds enjoyed a strong year. The Standard & Poor’s 500 returned just 5.49% last year.

“Hedge funds overcame a tumultuous fourth quarter, and managed to gain 14.13% for the year,” Nadia Van Dalen, hedge fund analyst at Morningstar, said. “The credit crunch intensified in August and November, preventing hedge funds from significantly building on their previous gains.”

Among individual strategies, global equity came in a distant second to emerging markets, returning 15.95% on the year. Only three other strategies, global non-trend, global trend (systematic futures and currencies traders) and global debt, topped Morningstar’s “grand average,” adding 14.86%, 14.69% and 14.56%, respectively, on the year.

During the fourth quarter, global trend and short equity funds were the strongest performers, at 6.52% and 6.17% (7.8% in 2007), respectively.

Investors in distressed securities were not so lucky as the globally inclined. Distressed hedge funds returned just 5.09%. Developed Asia equity funds also lagged their hedge fund counterparts, returning 6.03% on the year.

Funds of funds were up 13.25%, after a 2.58% fourth-quarter return.

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