Morningstar: Hedge Funds Rise In March

Apr 22 2009 | 11:54am ET

The Morningstar 1000 Hedge Fund Index rose 2.1% in March (0.1% YTD), while the currency-hedged Morningstar MSCI Asset-Weighted Hedge Fund Composite Index increased 0.1% (0.5%) as hedge funds took modest advantage of March's upswings in the global equity and credit markets.

Equity markets around the world significantly rebounded in March as appetite for risk returned, especially in emerging markets. Positive lending and manufacturing news in China coupled with higher commodity prices, which helped stocks in other emerging economies such as Russia, drove the Morningstar MSCI Emerging Markets and Morningstar Emerging Markets Hedge Fund Indexes to increase 4.2% and 6.2%, respectively.

“In March we saw a recovery in equity and some credit markets, which helped hedge funds post small gains,” said Nadia Papagiannis, Morningstar hedge fund analyst. “But many hedge fund managers, believing that the economy is not yet out of hot water, continued to remain cautious, and were not strongly positioned to participate in the market rally.”

The Morningstar MSCI Developed Markets Hedge Fund Index rose only 1.1% in March compared to the MSCI World Index, which climbed 7.2%.

The Treasury EuroDollar spread narrowed slightly during the month indicating an increase in market liquidity. The number of new investment-grade corporate bonds doubled in the first quarter over the first quarter of 2008, bolstered by government-guaranteed debt of financial institutions. High-yield bonds fared particularly well, although the lowest-rated debt instruments suffered some from illiquidity. The Morningstar Distressed Securities Hedge Fund Index rose 1.2% in March, but declined 1.7% over the quarter, while the Morningstar Global Debt Hedge Fund Index rose 2.4% in March and 0.4% for the quarter.

Convertible bonds rallied in March, as the extremely wide spreads caused by a forced sell off late last year made these bonds cheap for investors to purchase. The Morningstar Convertible Arbitrage Hedge Fund Index rose 3.9% in March and 7% over the quarter, making it the best-performing hedge fund category index. Convertible arbitrage and short equity hedge funds in Morningstar's database were the only categories to receive inflows in March—these funds saw inflows of $45 million and $42 million, respectively.

In aggregate, hedge funds in the database, excluding hedge funds of funds, experienced net outflows of $4.2 billion in February and $31.1 billion year-to-date.

The Morningstar Corporate Actions Hedge Fund Index, which includes funds that attempt to profit from mergers and acquisitions, initial public offerings, spin-offs, and capital restructuring, increased 2.2% in March and 3.4% for the quarter. Mergers and acquisitions in the first quarter fell to levels not seen since 2004, according to Dealogic, but deals from bankruptcies jumped in March, especially in the U.S. and Japan.

Global trend-following hedge funds, which profit from sustained upward or downward price trends in financial and commodity futures, saw a difficult month, as many contracts—most notably oil and gold—whipsawed during March. The Morningstar Global Trends Hedge Fund Index dropped 2% in March and 4.1% over the quarter.

On the bright side, fund managers in the Morningstar Global Non-Trend Index who tactically bet on fundamental macro-economic moves in the market, benefited from a rally in government bonds and stocks after the Federal Reserve and Bank of England implemented quantitative easing. This index rose 0.5% in March, but declined 0.1% over the quarter.

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