Morningstar: Hedge Funds Fall 1.5% In Q1

Apr 18 2008 | 2:39am ET

Hedge funds suffered their worst quarter in almost four years to open 2008, according to Morningstar.

The Morningstar 1000 Hedge Fund Index fell 1.51% during the first three months of the year. Hedge funds rebounded from January’s 2.38% decline in February, when they entered positive territory with a 2.43% return. But last month’s 1.5% loss wiped out February’s gain and sent hedge funds back into the red.

“Lack of liquidity and economic uncertainty negatively impacted almost all hedge funds,” Morningstar analyst Nadia Van Dalen. “The liquidity crisis that started in the summer of 2007 spilled over into 2008, punishing the markets and hedge funds’ portfolios.”

Just five of Morningstar’s 16 strategy indices were in the black during the first quarter. Global trend funds were far and away the best performers with a 9.77% return. Equity arbitrage and non-trend funds also posted meaningful positive performance, at 2.78% and 2.04%, respectively, while European equity and global debt funds were closer to flat, at 0.53% and 0.11%, respectively.

On the other side, last year’s strongest strategy, emerging markets, has been a big loser in 2008. Emerging markets funds lost 8.58% in the first quarter, with only U.S. small-cap equity hedge funds posting a bigger loss, at 8.7%.

Funds of hedge funds were down 1.52% on the quarter.

Despite the mostly disappointing returns for hedge funds, the industry outpaced the broader markets, with the Standard & Poor’s 500 declining 9.44% in the first quarter.

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